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International Currencies and Capital Allocation

Matteo Maggiori (), Brent Neiman () and Jesse Schreger

No 12973, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We establish that global portfolios are driven by an often neglected aspect: the currency of denomination of assets. Using a dataset of $27 trillion in security-level investment positions, we demonstrate that investor holdings are biased toward their own currencies to such an extent that each country holds the bulk of all debt securities denominated in their own currency, even those issued by foreign borrowers in developed countries. Surprisingly, currency is such a strong predictor of the nationality of a security's holder that the nationality of the issuer - to date, the most powerful predictor in a voluminous literature on cross-border portfolios - adds very little explanatory power. While large firms issue bonds in foreign currency and borrow from foreigners, the vast majority of firms issue only in local currency and do not directly access foreign capital. These patterns hold broadly across countries with the exception of countries, like the United States, that issue an international currency. The global willingness to hold the US dollar means that even smaller US firms that borrow exclusively in dollars have little difficulty borrowing from abroad. Global portfolios shifted sharply away from the euro and toward the dollar starting with the 2008 financial crisis, further cementing the dollar's international role and potentially amplifying the benefit that its status brings to the US.

Keywords: Capital Flows; Exorbitant Privilege; Home Bias; reserve currencies (search for similar items in EconPapers)
JEL-codes: E42 E44 F3 F55 G11 G15 G23 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-ifn, nep-knm, nep-mac, nep-mon and nep-opm
Date: 2018-06
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