International Currency Dominance

Joseph Abadi (), Jesús Fernández-Villaverde () and Daniel Sanches ()
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Joseph Abadi: Federal Reserve Bank of Philadelphia
Jesús Fernández-Villaverde: University of Pennsylvania, NBER, and CEPR
Daniel Sanches: Federal Reserve Bank of Philadelphia

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: We present a micro-founded monetary model of the world economy to study international currency competition. Our model features “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 international monetary system’s dynamics under several 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 pages
Date: 2026
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