"Conventional wisdom states that the dollar took over as the leading international currency after the Second World War. This column presents new evidence from the bond markets suggesting it was much earlier in the 1920s. This implies that inertia and lock-in effects in international currencies are not all they’re cracked up to be and that the shift to a multipolar currency system might happen sooner than commonly believed.
The global economic and financial crisis has lent new impetus to discussions of the future of the international monetary and financial system. Some advocate moving to a multipolar system in which the US dollar shares its international currency role with the euro, the Chinese renminbi and/or the IMF’s Special Drawing Rights. At the Cannes Summit of November 2011, G20 Leaders committed to taking “concrete steps” to ensure that the international monetary system reflects “the changing equilibrium and the emergence of new international currencies”.
Some observers expect this change to develop spontaneously, as a natural consequence of the declining economic and financial dominance of the US and the increasingly multipolar nature of the global economy, together with the advent of the euro and gradual internationalisation of the renminbi. Sceptics object that the prospect of a shift to a multipolar monetary and financial system is remote. If it occurs, they insist, such a transition would take many decades to complete.
The view that a shift to a multipolar system is unlikely to occur rapidly is rooted in theoretical models where international currency status is characterised by network externalities (see for example Krugman 1980 and 1984; Matsuyama et al. 1993; Zhou 1997; Hartmann 1998; and Rey 2001). These give rise to lock-in and inertia effects, which benefit the incumbent.
Such models rest, in turn, on a conventional historical narrative, epitomised by Triffin (1960), according to which it took between 30 and 70 years, depending on the aspects of economic and international currency status considered, from when the US overtook Britain as the leading economic and commercial power and when the dollar overtook sterling as the dominant international currency. Allegedly, sterling remained the dominant international currency throughout the interwar years and even for a time after the Second World War.
Recent studies (Eichengreen and Flandreau 2009 and 2010) have challenged this conventional account, showing that the dollar in fact overtook sterling already in the mid-1920s as lead currency for financing and settling trade and the leading form of international reserves. This “new view”, to paraphrase Frankel (2011), also challenges broader implications of the conventional narrative. It suggests that inertia and the advantages of incumbency are not all they are cracked up to be. It challenges the notion that there is room for only one international currency in the global system, as well as the presumption that dominance, once lost, is gone forever.
In a recent paper (Chiţu et al. 2012), we reexamine the role of international currencies as vehicles and currencies of denomination for foreign investment. Specifically, we analyse the currency denomination of foreign public debt for 33 countries in the period 1914-1946. The results lend further support to the “new view”..."
at http://www.voxeu.org/index.php?q=node/8024
No comments:
Post a Comment