Currency Dominance Is Not Forever: Some Insights from a Non-linear Dynamic Model

Michael Bordo and Cecile Bastidon
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Michael Bordo: Rutgers University and NBER
Cecile Bastidon: U. Toulon & CAC-IXXI Complex Systems Institute, Lyon, and OFCE-Sciences Po, Paris

Working Papers from Princeton University, Department of Economics, Center for Economic Policy Studies.

Abstract: We propose stress tests based on an original International Monetary System (IMS) model with regime switchings. The model is calibrated for nine reference currencies from the beginning of the Classical Gold Standard to the present. Regime switchings in currency dominance are related to combinations of conditions on a multidimensional environment variable that includes five classes of shocks: technology; development; monetary, financial and fiscal institutions; democracy and conflicts; and the regulatory environment. We provide an original database of events for these five classes of shocks, which is used for calibration. The calibration highlights the important role of the democracy and conflicts component in regime switchings. The calibrated model is then used to perform stress tests on the current prospects of currency dominance for a broad set of scenarios. A salient result from the scenarios we tested is that the dominance of the US dollar is at most marginally affected. No other currency emerges as a major player, suggesting strong inertia in the system’s current centripetal dynamics.

Keywords: International monetary system; Currency dominance; Democracy; Conflicts; Geopolitics; Monetary and financial graphs; Non-linear modeling; Conditional Markov chains (search for similar items in EconPapers)
JEL-codes: C3 C82 E42 F33 G15 N2 (search for similar items in EconPapers)
Date: 2026-08
New Economics Papers: this item is included in nep-his, nep-ifn, nep-mon and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:pri:cepsud:355

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