The Functions of a Key Currency: International Liquidity Provision and Insurance

Masayuki Otaki

Chapter 6 in Keynesian Economics and Price Theory, 2015, pp 75-85 from Springer

Abstract: Abstract Some previous studies assert that the selection of a key currency is a kind of hysteresis dominated by contingencies. However, historical evidence suggests that this selection depends on the two plausible and inevitable economic factors that this study examines: overwhelming industrial power and the possession of large amounts of foreign assets and gold. Based on the acquisition of these economic factors, a key-currency country receives rents in return for bearing the sovereign risk and supplying sufficient liquidity to countries within its network that accept its currency. Thus, the key-currency system can be regarded as an international liquidity provision and insurance system that relies on the economic power of the key-currency country.

Keywords: Key currency as an insurance system; International liquidity provision; Rents from issuing a key currency; Sovereign risk (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advchp:978-4-431-55345-8_6

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DOI: 10.1007/978-4-431-55345-8_6

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