Banking, Trade, and the making of a Dominant Currency
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.
We are grateful to Chris Anderson and Taehoon Kim for outstanding research assistance, and to Stefan Avdjiev, Leonardo Gambacorta, and Swapan-Kumar Pradhan of the Bank for International Settlements for helping us to better understand the construction of the BIS banking data. Thanks also to Andres Drenik and seminar participants at various institutions for helpful comments. Gopinath acknowledges that this material is based upon work supported by the NSF under Grant Number #1628874. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the author(s) and do not necessarily reflect the views of the NSF or the National Bureau of Economic Research. All remaining errors are our own.
Jeremy C. Stein
Jeremy C. Stein
Outside (Non-Harvard) Activities Since 2006
A. Compensated Activities*
I have given paid talks for a number of financial firms, investor groups, academic institutions, and central banks.
Key Square Capital Management: consultant, July 2016-present.
BlueMountain Capital Management: consultant, 2015.
Guggenheim Partners: consultant, 2005-2007.
The Clearing House Association: “An Analysis of the Impact of ‘Substantially Heightened’ Capital Requirements on Large Financial Institutions,” unpublished paper with Anil Kashyap and Samuel Hanson, 2010.
Honoraria for Papers
Federal Reserve Bank of Kansas City, for “Rethinking Capital Regulation,” with Anil Kashyap and Raghuram Rajan, 2008.
Federal Reserve Bank of Kansas City, for “The Federal Reserve’s Balance Sheet as a Financial Stability Tool,” with Robin Greenwood and Sam Hanson, 2016.
Brookings Institution, for “Strengthening and Streamlining Bank Capital Regulation,” with Robin Greenwood, Sam Hanson and Adi Sunderam, 2017.
Federal Reserve Board: Governor, May 2012-May 2014.
U.S. Treasury Department: Senior Advisor to the Secretary and concurrently, staff of National Economic Council, February-July 2009.
Quarterly Journal of Economics: co-editor, 2011-2012.
Journal of Economic Perspectives: co-editor, 2007-2008.
Study Center, Gerzensee, Switzerland: summer-school course, 2011.
Northwestern University: visiting scholar, 2009.
B. Significant Non-Compensated Activities
Harvard Management Company: Board of Directors, 2015-present.
American Finance Association: President, 2008 President-Elect, 2007 Vice-President, 2006 Board of Directors, 2009-2011.
Financial Advisory Roundtable, Federal Reserve Bank of New York, 2006-2012.
Squam Lake Group, 2008-2012.
*Excludes honoraria from non-profit institutions, government agencies, and academic journals of $3,000 or less in a given year, and payments from for-profit firms of $500 or less in a given year.
Gita Gopinath & Jeremy C Stein, 2021. "Banking, Trade, and the Making of a Dominant Currency*," The Quarterly Journal of Economics, vol 136(2), pages 783-830. citation courtesy of