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Banking, Trade, and the making of a Dominant Currency

Gita Gopinath and Jeremy Stein ()

No 24485, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We explore the interplay between trade invoicing patterns and the pricing of safe assets in different currencies. Our theory highlights the following points: 1) a currency’s role as a unit of account for invoicing decisions is complementary to its role as a safe store of value; 2) this complementarity can lead to the emergence of a single dominant currency in trade invoicing and global banking, even when multiple large candidate countries share similar economic fundamentals; 3) firms in emerging-market countries endogenously take on currency mismatches by borrowing in the dominant currency; 4) the expected return on dominant-currency safe assets is lower than that on similarly safe assets denominated in other currencies, thereby bestowing an “exorbitant privilege” on the dominant currency. The theory thus provides a unified explanation for why a dominant currency is so heavily used in both trade invoicing and in global finance.

JEL-codes: E0 F0 G0 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-mon and nep-pay
Date: 2018-04
Note: CF EFG IFM ME
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