Trade Finance and the Durability of the Dollar

Ryan Chahrour and Rosen Valchev

The Review of Economic Studies, 2022, vol. 89, issue 4, 1873-1910

Abstract: We propose a model in which the emergence of a single dominant currency is driven by the need to finance international trade. The model generates multiple stable steady states, each characterized by a different dominant asset, consistent with the historical durability of real-world currency regimes. The persistence of regimes is caused by a positive interaction between the returns to saving in an asset and the use of that asset for financing trade. A calibrated version of the model shows that the welfare gains of dominance are substantial, but accrue primarily during the transition to dominance. We perform several counterfactual experiments to assess potential threats to the dollar’s continued dominance.

Keywords: Trade finance; Dollar dominance; Exorbitant privilege; Liquidity premium; Global imbalances; E44; F02; F33; F41; G15 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:89:y:2022:i:4:p:1873-1910.

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