Banking, Trade, and the making of a Dominant Currency / Gita Gopinath, Jeremy C. Stein.

Format:

Book

Author/Creator:

Gopinath, Gita.

Contributor:

National Bureau of Economic Research.

Stein, Jeremy C.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24485.

NBER working paper series no. w24485

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

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.

Notes:

Print version record

April 2018.