International Currency Dominance

Joseph Abadi, Jesus Fernandez-Villaverde and Daniel Sanches
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Joseph Abadi: https://www.philadelphiafed.org/our-people/joseph-abadi

No 26-21, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: We present a micro-founded monetary model of the world economy to study international currency competition. Our model features both “unipolar” equilibria, with a single dominant international currency, and “multipolar” equilibria, in which multiple currencies circulate internationally. Long-run equilibria are highly history-dependent and tend towards the emergence of a dominant currency. Governments can compete to internationalize their currencies by offering attractive interest rates on their sovereign debt, but large economies have a natural advantage in ensuring the dominance of their currencies. We calibrate the model to assess the quantitative importance of these mechanisms and study the dynamics of the international monetary system under counterfactual scenarios.

Keywords: dominant currency; international monetary system; strategic complementarities; history dependence (search for similar items in EconPapers)
JEL-codes: E42 E58 G21 (search for similar items in EconPapers)
Pages: 52
Date: 2026-04-15
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-ifn, nep-mon and nep-pay
Note: supersedes 25-20
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Related works:
Working Paper: International Currency Dominance (2026)
Working Paper: International Currency Dominance (2026)
Working Paper: International Currency Dominance (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:103040

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DOI: 10.21799/frbp.wp.2026.21

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