Hegemony or Harmony? A Unified Framework for the International Monetary System

Tao Liu (), Dong Lu () and Liang Wang ()
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Tao Liu: Central University of Finance and Economics
Dong Lu: Renmin University of China
Liang Wang: University of Hawaii

No 202504, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: There have been two competing views on the structure of the international monetary system: one sees it as a unipolar system with a dominant currency, such as the U.S. dollar, while the other argues that a multipolar system has been the rule, not the exception. We propose a unified theoretical framework to reconcile these two views. In a micro-founded monetary model, we examine the interactions of two essential roles played by international currencies, the medium of exchange and the store of value, and highlight the importance of abundant safe asset supplies. When the two roles reinforce each other, a unipolar equilibrium exists. However, when one currency is unable to serve as sufficient safe assets for international trade transactions, the two roles work against each other, and agents have the incentive to diversify their portfolio, giving rise to a multipolar system. The effects of monetary policy, fiscal policy, and their combinations crucially depend on the total supply of safe assets and the relative importance of the two functions of international currencies. The structure of the international monetary system could be influenced by various policies such as monetary policy, fiscal policy, and financial sanctions. A calibrated model shows that, all else equal, USD could lose its dominance if the US fiscal capacity deteriorates by 34\% or the US economy size shrinks by 32%.

Keywords: International Currency; Money; Multipolar; Safe Assets; Unipolar (search for similar items in EconPapers)
JEL-codes: E42 E52 F33 F40 (search for similar items in EconPapers)
Date: 2025-09
New Economics Papers: this item is included in nep-fdg and nep-ifn
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