Dominant Currency Debt

96 Pages Posted: 22 May 2019

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: May 13, 2019

Abstract

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

Eren, Egemen and Malamud, Semyon, Dominant Currency Debt (May 13, 2019). BIS Working Paper No. 783, Available at SSRN: https://ssrn.com/abstract=3390976

Egemen Eren (Contact Author)

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

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Semyon Malamud

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
45
Abstract Views
375
PlumX Metrics