TY - JOUR AU - Chinn,Menzie D. AU - Frankel,Jeffrey A. TI - The Euro May Over the Next 15 Years Surpass the Dollar as Leading International Currency JF - National Bureau of Economic Research Working Paper Series VL - No. 13909 PY - 2008 Y2 - April 2008 UR - http://www.nber.org/papers/w13909 L1 - http://www.nber.org/papers/w13909.pdf N1 - Author contact info: Menzie D. Chinn Dept. of Economics University of Wisconsin 1180 Observatory Drive Madison, WI 53706 Tel: 608/262-7397 Fax: 608/262-2033 E-Mail: mchinn@lafollette.wisc.edu Jeffrey A. Frankel Kennedy School of Government Harvard University 79 JFK Street Cambridge, MA 02138 Tel: 617/496-3834 Fax: 617/496-5747 E-Mail: jeffrey_frankel@harvard.edu AB - The euro has arisen as a credible eventual competitor to the dollar as leading international currency, much as the dollar rose to challenge the pound 70 years ago. This paper uses econometrically-estimated determinants of the shares of major currencies in the reserve holdings of the world’s central banks. Significant factors include: size of the home country, rate of return, and liquidity in the relevant home financial center (as measured by the turnover in its foreign exchange market). There is a tipping phenomenon, but changes are felt only with a long lag (we estimate a weight on the preceding year’s currency share around .9). The equation correctly predicts out-of-sample a (small) narrowing in the gap between the dollar and euro over the period 1999-2007. This paper updates calculations regarding possible scenarios for the future. We exclude the scenario where the United Kingdom joins euroland. But we do take into account of the fact that London has nonetheless become the de facto financial center of the euro, more so than Frankfurt. We also assume that the dollar continues in the future to depreciate at the trend rate that it has shown on average over the last 20 years. The conclusion is that the euro may surpass the dollar as leading international reserve currency as early as 2015. ER -