Dollar Erosion: Understanding the Loss of Reserve Currency Status

Zhengyang Jiang, Arvind Krishnamurthy, Hanno Lustig and Robert Richmond

No 35328, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We quantify the impact of the loss of reserve currency status in goods and asset markets. In goods markets, the loss of seigniorage (1% of GDP per annum) makes American households spend less, mostly on U.S. goods, leaving an excess supply of U.S. goods to be cleared by a real depreciation of the dollar. The larger the home bias and the lower the elasticity of substitution between home and foreign goods, the larger the required depreciation. Standard parameters imply an 8.8% real depreciation of the dollar. In asset markets, about 50% of GDP in dollar bonds must be reabsorbed by home investors, raising the U.S. real interest rate. Standard parameters imply a 90 basis points rise, leading to an aggregate wealth loss of roughly one year of U.S. GDP.

JEL-codes: F0 (search for similar items in EconPapers)
Date: 2026-06
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