Banking, Trade, and the Making of a Dominant Currency

68 Pages Posted: 12 Apr 2018

See all articles by Gita Gopinath

Gita Gopinath

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 2018

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.

Suggested Citation

Gopinath, Gita and Stein, Jeremy C., Banking, Trade, and the Making of a Dominant Currency (April 2018). NBER Working Paper No. w24485. Available at SSRN: https://ssrn.com/abstract=3158924

Gita Gopinath (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jeremy C. Stein

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-496-6455 (Phone)
617-496-7352 (Fax)

HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html

National Bureau of Economic Research (NBER)

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