Template-Type: ReDIF-Paper 1.0
Author-Name: Egemen Eren
Author-X-Name-First: Egemen
Author-X-Name-Last: Eren
Author-Name: Semyon Malamud
Author-X-Name-First: Semyon
Author-X-Name-Last: Malamud
Title: Dominant currency debt
Abstract: We propose a "debt view" to explain the dominant international role of the dollar. We develop an international general equilibrium model in which firms optimally choose the currency composition of their nominal debt. Expansionary monetary policy in downturns prevents Fisherian debt deflation through its effects on inflation and exchange rates, and alleviates financial distress. Theoretically, the dominant currency is the one that depreciates in global downturns over horizons of corporate debt maturity. Empirically, the dollar fits this description, despite being a short-run safe-haven currency. We provide broad empirical support for the debt view. We also study the globally optimal monetary policy.
Length: 96 pages
Creation-Date: 2019-05
File-URL: https://www.bis.org/publ/work783.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work783.htm
File-Format: text/html
Number: 783
Classification-JEL: E44, E52, F33, F34, F41, F42, F44, G01, G15, G32
Keywords: dollar debt, dominant currency, exchange rates, inflation, debt deflation
Handle: RePEc:bis:biswps:783