Dominant Currency Debt

97 Pages Posted: 22 Aug 2018 Last revised: 29 Nov 2018

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

Multiple version iconThere are 3 versions of this paper

Date Written: November 27, 2018


Why is the dollar the dominant currency for debt contracts and what are its macroeconomic implications? We develop an international general equilibrium model where firms optimally choose the currency composition of their debt. We show that there always exists a dominant currency debt equilibrium, in which all firms borrow in a single dominant currency. It is the currency of the country that effectively pursues aggressive expansionary monetary policy in global downturns, lowering real debt burdens of firms. We show that the dollar empirically fits this description, despite its short term safe haven properties. We provide further modern and historical empirical support for our mechanism across time and currencies. We use our model to study how the optimal monetary policy differs if the Federal Reserve reacts to global versus domestic conditions.

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: or

Egemen Eren

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

Centralbahnplatz 2
CH-4002 Basel

Semyon Malamud (Contact Author)

Ecole Polytechnique Federale de Lausanne ( email )

Lausanne, 1015

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

Swiss Finance Institute

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

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