Dominant Currency Debt

65 Pages Posted: 22 Aug 2018 Last revised: 14 Sep 2020

See all articles by Egemen Eren

Egemen Eren

Bank for International Settlements (BIS) - Monetary and Economic Department

Semyon Malamud

Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute

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Date Written: November 27, 2018

Abstract

We propose a "debt view" to explain the dominant international role of the dollar and provide broad empirical support for it. Within a simple capital structure model in which firms optimally choose the currency composition of their debt, we derive conditions under which all firms issue debt in a single, "dominant" currency. Theoretically, it is the currency that depreciates in global downturns over horizons of typical debt maturity of firms. Both forward-looking and historical covariances suggest that the dollar fits this description better than all major currencies, especially for longer horizons. The debt view can jointly explain the fall and the rise of the dollar in international debt markets over the last two decades.

Keywords: Dollar debt, dominant currency, exchange rates, inflation

JEL Classification: E44, E52, F33, F34, F41, F42, F44, G01, G15, G32

Suggested Citation

Eren, Egemen and Malamud, Semyon, Dominant Currency Debt (November 27, 2018). Swiss Finance Institute Research Paper No. 18-55, Available at SSRN: https://ssrn.com/abstract=3236660 or http://dx.doi.org/10.2139/ssrn.3236660

Egemen Eren

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Semyon Malamud (Contact Author)

Ecole Polytechnique Federale de Lausanne ( email )

Lausanne, 1015
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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