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Explaining the resurgence of the U.S. dollar in international debt

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In 2020, the share of the dollar in international debt could amount to 63%, and the share of the euro to 18%. In this study, we focus on the development of shares of major foreign currencies, namely the US. First, data on international debt securities are now collected with a focus on the primary market for the debt securities in question.

The international markets for debt instruments should also be market-driven in terms of the choice of currencies for debt par value.

Theoretical Predictions

To investigate the effect of financial development on the choice of currency, we test private credit creation (as a share of GDP: PCGDP).10 We expect a negative estimate for the coefficient in the estimates for the share of the US dummy for EU States: We assigns the value of one to the countries participating in the European Union, regardless of the year of accession to the union, i.e. time invariant. The estimate of this dummy should be negative for the US. For estimating the share of total foreign exchange, we use the share of a sample country's exports of total world exports.

To measure capital account openness, we use the Chinn-Ito capital account openness index (Chinn and Ito and updates).

Findings from the Baseline Model

The significantly positive estimate of the effect of financial development in the euro share estimate for the full sample is consistent with this story. Previously, we noted that a country with more developed financial markets tends to have less of its international debt denominated in the US. A country with more open financial markets will have a higher share of the euro in its international debt, while there is a tendency to lower dollar denominations, while the estimate on Financial openness in the total share of foreign exchange is significantly negative.

While the estimation results for the share of total foreign currencies also find significantly negative coefficients for institutional development, its impact has never been significant in the United States.

Robustness Checks

We therefore include a dummy for the currency and debt crisis individually and jointly in each specification for the US share. To identify the types of crises, we use crisis dummies from Aizenman and Ito (2013). 17. Especially after the GFC, all major currency issuers, the US

The increase in the dollar share that happened immediately after the GFC we saw in Figure 5 may be due. For this, we include interest rate differences in relation to those of the major currency issuers as an additional regressor in our basic model. For the regression on the total share of foreign currency, we use the GDP-weighted average of the USA as the reference rate.

In the case of the euro-stock regression, we find a persistent negative and significant effect of the dollar zone weight variable in the full sample, but not in the subsample of. Some of the explanatory variables may also be correlated with the dollar zone weight measure, which may lead to reversed signs of the estimates. Conversely, the appreciation trend of the home currency can help lower shares of major currencies such as

To examine this, we include the five-year moving average of the depreciation rate of the nominal exchange rate in the currency share regressions. While the signs and significance of the estimates of the explanatory variables from our baseline model remain intact, the exchange rate trend variable is never found statistically.

A Counterfactual Analysis: What Would Have Happened to the Euro If It Were Not for the Global Financial Crisis

Before showing our out-of-sample predictions, we should note that when we test the coefficient stability over the crisis period, we significantly reject the stability of the estimates. The share of the Euro could have been around 24%, higher than the in-sample forecast of 18% and the observed 15%. Again, these results suggest that the Euro share could have been higher had it not been for the Global Financial Crisis.

23 More specifically, to show the impact of the crisis, we should use prior (e.g., forecast or survey) data from 2007 for the explanatory variables in the 2008–2013 forecasts, so that the out-of-sample data could be more unaffected by the crisis. However, it is not feasible to obtain such prior data for all explanatory variables. Therefore, our counter-hypothetical out-of-sample forecasts are quite conservative in terms of representing trends in currency shares under non-crisis conditions.

25 We first make out-of-sample predictions, then average the predictions over the country group of concern. These results suggest that the crisis appears to have helped restore the dominant role of the US in Figures 8 (a) and (b) illustrate the observed stock series together with out-of-sample forecasts for full and developing countries. samples while Figure 9 (c) illustrates the within-sample prediction for the full sample.

In 2013, the share of foreign currency debt in a non-crisis situation would have been smaller by around 4% for the entire sample. Given that proportions had been consistently high in the early years of the sample, differences between the observed and predicted proportions of this magnitude are not inconsequential.

Counterfactual Predictions of Individual Countries

Among developing countries, a rather flattened hump share for the Euro and a flat U-shape for the US. In particular, the forecasts for developed economies may differ more from the forecasts because developing countries make up a larger part of the entire sample. Overall, among the four individual economies, we can see that the out-of-sample forecasts are consistent with what we observed in the aggregate pictures in Figure 7.

For all four economies, the observed Euro shares are lower than the pre-crisis forecasts. While Japan and Denmark both show rapid increases in dollar-denominated debt in the post-crisis period and part of the increases can be explained by the flight to quality for the dollar and the flight from the Euro as the GFC occurred in 2008 followed by the Euro debt crisis after 2010. Japan's case appears to be quite unique with its wide variation in the dollar share.

In the last few years, financial news agencies have reported that Japanese firms have been active in issuing dollar-denominated debt. One of the reasons for that is because, compared to European and American financial institutions, Japanese financial institutions, which focused on. Furthermore, the dollar-yen exchange rate was so volatile that the issuance of debt in the US.

Thus, dollar issuance increased as Japanese firms sought to fill the gap after European or American firms declined in international markets. Mexico and Thailand represent the trend among developing countries in terms of their continued reliance on dollar-denominated debt, although Mexico has issued more.

Prospects of Foreign Currency-denominated International Debt

Using the estimation results, we also carried out counterfactual analyses, focusing on how developments in the currency shares in the denomination of international debt would have changed if the GFC had not occurred. In fact, while the use of the euro is roughly proportional to the share of the euro economies in the total export destination, the use of the faster US economic growth would also cause a country to have a smaller share of international debt expressed in dollars. , but this would lead, albeit less significantly, to more euro or foreign currency denominations in total.

When we also make out-of-sample forecasts for the post-GFC period using the data up to 2007, we see that the trend of the share of the US would have been The share of the Euro would have been around 24% instead of the actual 15% and the share of total foreign currency would have been 90% instead of 94%. These findings suggest that the outbreak of the GFC caused demand for the U.S.

Global Safe Asset Shortages, Non-Traditional Reserve Currencies and the Global Financial Crisis', in The International Role of the Euro, European Central Bank, Frankfurt am Main. Determinants of the choice of invoicing currency: From Dutch guilders to euros in Dutch retail trade. Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System.

Managing a Multiple Reserve Currency World.” Prepared for the Asian Development Bank Institute/Earth Institute project on “Global Monetary System Reform” and in The 21st Century International Monetary System project volume, ed. The Role of Nominal Anchor Currencies in Exchange Rate Arrangements,” Journal of the Japanese and International Economies, vol.

Data Description

Country Classification Country include in the empirical analysis

Assumptions of Out-of-sample Forecasting Exercise

In addition, year dummies and a constant term are also included, although these are not reported to save space. The null hypothesis of the LR test is that the standard Tobit model is better fit than the random effect Tobit. In addition, year dummies and constant terms are also included, although they are not reported to save space.

Share of exports to the USA, %. of total trade and % international debt securities outstanding, respectively) Dollar-denominated trade and securities. Share of exports to euro countries, %. of total trade and % international debt securities outstanding, respectively) Euro-denominated trade and securities. Dollar and the Euro (a) Complete sample – Counterfactual. b) Developing countries – Counterfactual (c) Complete sample with in-sample prediction.

Pred-Foreign currency (non-euro)(2007) Foreign currency (non-euro) (% of foreign currency securities/total securities outstanding, non-euro countries). Pred-Foreign currency (non-euro)(2007) Foreign currency (non-euro) (% of foreign currency securities/total securities outstanding, non-euro countries).

Table 1: Determinants of the U.S. Dollar Share in International Debt, 1995-2013
Table 1: Determinants of the U.S. Dollar Share in International Debt, 1995-2013

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