Liquidity, Debt Denomination, and Currency Dominance

Antonio Coppola, Arvind Krishnamurthy and Chenzi Xu
Additional contact information
Arvind Krishnamurthy: Stanford U
Chenzi Xu: Stanford U

Research Papers from Stanford University, Graduate School of Business

Abstract: We provide a liquidity-based theory for the dominant use of the US dollar as the unit of denomination in global debt contracts. Firms need to trade their revenue streams for the assets required to extinguish their debt obligations. When asset markets are illiquid, as modeled via endogenous search frictions, firms optimally choose to denominate their debt in the unit of the asset that is easiest to obtain. This gives central importance to the denomination of government-backed assets with the largest safe, liquid, short-term float and to financial market institutions that facilitate safe asset creation. Equilibria with a single dominant currency emerge from a positive feedback cycle whereby issuing in the more liquid denomination endogenously raises its liquidity, incentivizing more issuance. We rationalize features of the current dollar-dominant international financial architecture and relate our theory to historical experiences, such as the prominence of the Dutch florin and pound sterling, the transition to the dollar, and the ongoing debate about the potential rise of the Chinese renminbi.

Date: 2023-02
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-ifn and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
https://www.gsb.stanford.edu/faculty-research/work ... n-currency-dominance

Related works:
Working Paper: Liquidity, Debt Denomination, and Currency Dominance (2023)
Working Paper: Liquidity, Debt Denomination, and Currency Dominance (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:4075

Access Statistics for this paper

More papers in Research Papers from Stanford University, Graduate School of Business Contact information at EDIRC.
Bibliographic data for series maintained by ().