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Dominant currency debt

Egemen Eren and Semyon Malamud

No 783, BIS Working Papers from Bank for International Settlements

Abstract: We propose a "debt view" to explain the dominant international role of the dollar. We develop an international general equilibrium model in which firms optimally choose the currency composition of their nominal debt. Expansionary monetary policy in downturns prevents Fisherian debt deflation through its effects on inflation and exchange rates, and alleviates financial distress. Theoretically, the dominant currency is the one that depreciates in global downturns over horizons of corporate debt maturity. Empirically, the dollar fits this description, despite being a short-run safe-haven currency. We provide broad empirical support for the debt view. We also study the globally optimal monetary policy.

Keywords: dollar debt; dominant currency; exchange rates; inflation; debt deflation (search for similar items in EconPapers)
JEL-codes: E44 E52 F33 F34 F41 F42 F44 G01 G15 G32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-opm
Date: 2019-05
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