Discussion paper
DP19078 Privilege Lost? The Rise and Fall of a Dominant Global Currency
Economic size matters for three key aspects of a dominant currency: safety, liquidity, and insurance. First, larger countries tend to be more diversified, increasing their debt capacity and safety. Secondly, the larger the share of a country in the supply of safe assets, the more liquid and attractive its bonds are. Finally, the larger a safe country’s share in the world economy, the more its bonds appreciate in downturns, providing insurance for investors. We argue that these three aspects reinforce each other and show how they erode if the dominant country grows less than the rest of the world.
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