NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Banking, Trade, and the making of a Dominant Currency

Gita Gopinath, Jeremy C. Stein

NBER Working Paper No. 24485
Issued in April 2018
NBER Program(s):Corporate Finance Program, Economic Fluctuations and Growth Program, International Finance and Macroeconomics Program, The Monetary Economics Program

We explore the interplay between trade invoicing patterns and the pricing of safe assets in different currencies. Our theory highlights the following points: 1) a currency’s role as a unit of account for invoicing decisions is complementary to its role as a safe store of value; 2) this complementarity can lead to the emergence of a single dominant currency in trade invoicing and global banking, even when multiple large candidate countries share similar economic fundamentals; 3) firms in emerging-market countries endogenously take on currency mismatches by borrowing in the dominant currency; 4) the expected return on dominant-currency safe assets is lower than that on similarly safe assets denominated in other currencies, thereby bestowing an “exorbitant privilege” on the dominant currency. The theory thus provides a unified explanation for why a dominant currency is so heavily used in both trade invoicing and in global finance.

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Document Object Identifier (DOI): 10.3386/w24485

 
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