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Mars or Mercury? The Geopolitics of International Currency Choice

Barry Eichengreen (), Arnaud Mehl () and Livia Chitu ()

No 24145, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We assess the role of economic and security considerations in the currency composition of international reserves. We contrast the “Mercury hypothesis” that currency choice is governed by pecuniary factors familiar to the literature, such as economic size and credibility of major reserve currency issuers, against the “Mars hypothesis” that this depends on geopolitical factors. Using data on foreign reserves of 19 countries before World War I, for which the currency composition of reserves is known and security alliances proliferated, our results lend support to both hypotheses. We find that military alliances boost the share of a currency in the partner’s foreign reserve holdings by 30 percentage points. These findings speak to current discussions about the implications of possible U.S. disengagement from global geopolitical affairs. In a hypothetical scenario where the U.S. withdraws from the world, our estimates suggest that long-term U.S. interest rates could rise by as much as 80 basis points, assuming that the composition of global reserves changes but their level does not.

JEL-codes: F0 F33 F51 N0 N1 (search for similar items in EconPapers)
Date: 2017-12
New Economics Papers: this item is included in nep-his and nep-mon
Note: DAE IFM
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Published as Barry Eichengreen & Arnaud Mehl & Livia Chiţu & Thorsten Beck, 2019. "Mars or Mercury? The geopolitics of international currency choice*," Economic Policy, vol 34(98), pages 315-363.

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