Dominant Currency Debt
96 Pages Posted: 22 May 2019
Date Written: May 13, 2019
We propose a "debt view" to explain the dominant international role of the dollar. We develop an international general equilibrium model in which firms optimally choose the currency composition of their nominal debt. Expansionary monetary policy in downturns prevents Fisherian debt deflation through its effects on inflation and exchange rates, and alleviates financial distress. Theoretically, the dominant currency is the one that depreciates in global downturns over horizons of corporate debt maturity. Empirically, the dollar fits this description, despite being a short-run safe-haven currency. We provide broad empirical support for the debt view. We also study the globally optimal monetary policy.
Keywords: dollar debt, dominant currency, exchange rates, inflation, debt deflation
JEL Classification: E44, E52, F33, F34, F41, F42, F44, G01, G15, G32
Suggested Citation: Suggested Citation