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“The European Central Bank is eager to expand its role in developing central bank digital currencies (CBDCs), but that doesn’t mean private enterprises can’t join the party,” said President Christine Lagarde.
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A paper by IMF Chief Economist Gita Gopinath finds that most trade is invoiced in very few currencies. Yet, standard models assume prices are set in either the producer’s or destination’s currency. The paper presents instead a ‘dominant currency paradigm’ with three key features: pricing in a dominant currency, pricing complementarities, and imported input use in production.
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Another paper by IMF Chief Economist Gita Gopinath explores the interplay between trade invoicing patterns and the pricing of safe assets in different currencies. It highlights the following points: 1) a currency’s role as a unit of account for invoicing decisions is complementary to its role as a safe store of value; 2) 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; 3) firms in emerging-market countries endogenously take on currency mismatches by borrowing in the dominant currency; 4) 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.
Kiffmeister’s Fintech Daily Digest 01/08/2020
