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Journal of Financial Economics Vol. 144 No. 2 2022

Dominant currency debt

Egemen Eren1; Semyon Malamud2,3,4

1 Bank for International Settlements · 2 Centre for Economic Policy Research · 3 École Polytechnique Fédérale de Lausanne · 4 Swiss Finance Institute

open access

Abstract

We propose a “debt view” to explain the dominant international role of the dollar. Within a simple capital-structure model with debt-currency choice, we show that the “dominant currency” is the one that (1) depreciates in global downturns over horizons of typical debt maturity and (2) has the steepest nominal yield curve. Empirically, we show the dollar fits this description better than other major currencies. The debt view can explain dollar-debt-issuance patterns over the past two decades. It also offers insights into the future of the dominance of the dollar in the aftermath of the COVID-19 crisis.

DOI
10.1016/j.jfineco.2021.06.023
Volume
144
Issue
2
Pages
571-589
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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