Banking, Trade, and the Making of a Dominant Currency*

By Gita Gopinath, Jeremy C. Stein. Quarterly Journal of Economics, 2020

298 citations recorded by the source corpus.

We explore the interplay between trade-invoicing patterns and the pricing of safe assets in different currencies. Our theory highlights the following points: (i) a currency’s role as a unit of account for invoicing decisions is complementary to its role as a safe store of value; (ii) 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; (iii) firms in emerging-market countries endogenously take on currency mismatches by borrowing in the dominant currency; and (iv) 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.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/e012396827049bb2001e8a1e765dabf0df3ba3da

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Citations in the corpus

Designing Central Bank Digital Currencies (2019, unknown): “The manner in which we combine consumption with payment preferences bears similarity to the utility function adopted in Gopinath and Stein (2018). (19)See Appendix C.”
International Currencies and Capital Allocation (2020, unknown): “Our work relates to a large empirical literature linking net foreign asset dynamics to the differential composition of gross assets and gross liabilities, including important contributions by Lane and Milesi-Ferretti (2007), Gourinchas and Rey (2007), and Curcuru et al.”
U.S. Monetary Policy and International Risk Spillovers (2019, background): “See Gopinath and Stein (2018) for a model of endogenous UIP deviations with a central role for the safe U.S. assets.”
U.S. Monetary Policy and the Global Financial Cycle (2020, background): “Gopinath (2016) analyses the disproportionate role of the dollar in trade invoicing, and Gopinath and Stein (2017) the synergies between some of those roles.”