Openness, Integration, and the International Monetary Order

Tarek Hassan, Thomas Mertens, Jingye Wang and Tony Zhang

No 21815, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper develops a calibrated general-equilibrium model to study how different configurations of trade and financial policy reshape the hierarchy of global currencies --- and the U.S. dollar's position at its anchor. Currency safety and anchor status arise endogenously from each economy's 'effective size' — the weight its domestic shocks carry in setting world prices. Tariffs reduce this effective size on the goods side; capital controls do the same on the financial side. A unifying result emerges: The economy that maintains the deepest integration with the global trading network retains the largest safety premium and gains anchor status. We use this framework to evaluate the effects of three policy levers for Europe that affect the effective size of the euro: internal harmonization and enlargement, trade openness, and capital-account openness. The stakes are large: In our model, shifts in currencies' safety can redirect global capital flows and alter sovereign borrowing costs by hundreds of billions of dollars annually.

JEL-codes: F13 F31 F33 F38 G15 (search for similar items in EconPapers)
Date: 2026-08
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