Financial Innovation and the International Monetary System

Gordon Liao, Eswar Prasad and Tony Zhang

No 35822, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show that the dollar remains dominant in most aspects of global finance. The euro and renminbi are competing in an increasingly fragmented second tier of currencies, leaving no clear rivals to the dollar. We study how financial innovation could reshape the international monetary system. In principle, innovation levels the playing field between countries, for instance by reducing the need for vehicle currencies to intermediate transactions between other currency pairs and by making it easier to acquire and trade foreign assets. We show that an alternative outcome is more likely. Innovations that reduce frictions in cross-border transactions, especially dollar-backed payment stablecoins and other forms of tokenization of money, could interact with relative market thickness to reinforce the dollar’s dominance. This outcome is not preordained but depends on other countries’ willingness to embrace innovations and strengthen their financial markets and regulatory frameworks. While unipolarity has many disadvantages, we show that in some circumstances multipolarity might result in greater global fragility at times of financial market stress.

JEL-codes: E42 E51 F33 F36 G15 G33 O33 (search for similar items in EconPapers)
Date: 2026-09
New Economics Papers: this item is included in nep-ifn, nep-mon and nep-pay
Note: IFM ME
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