Dominant Currency Paradigm: A Review
A handful of currencies, especially the US dollar, play a dominant role in international trade. We survey the active theoretical and empirical literature that documents patterns of currency use in global trade, the implications of dominant currencies for international transmission of shocks, exchange rate pass-through, expenditure switching, and optimal monetary policy. We describe advances in the endogenous currency choice literature including conditions for the emergence and persistence of dominant currency equilibria.
Forthcoming in the Handbook of International Economics, Volume 5. We thank Ariel Burstein, Dima Mukhin and Ken Rogoff for insightful comments. The views expressed in this paper are those of the authors and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.