The Dollar in an Era of International Retrenchment

Ryan Chahrour and Rosen Valchev

No 31405, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper uses a quantitative theory to explore whether escalating geoeconomic conflict and protectionism could threaten the dominant role of the US dollar in the international monetary system. The theory emphasizes the joint determination of countries’ portfolio choices and the currency used for financing international trade, and introduces the Chinese yuan as a potential competitor to the dollar. We find that even a substantial increase in trade tariffs and protectionism would not change the dollar’s dominant role. However, policies directly supporting the yuan’s international use could end the dollar’s dominance if implemented for more than a decade. US economic sanctions on a substantial portion of dollar assets held abroad also pose a threat, but only if maintained for more than 15 years. If competing trading blocs substantively eliminated trade across blocs, a regime with bloc-specific dominant currencies becomes likely.

JEL-codes: E44 F02 F33 F41 G15 (search for similar items in EconPapers)
Date: 2023-06
New Economics Papers: this item is included in nep-ifn, nep-int, nep-mon and nep-opm
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Journal Article: The Dollar in an Era of International Retrenchment (2024)
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