TITLE:
How a Key Currency Functions as an International Liquidity Provision and Insurance System
AUTHORS:
Masayuki Otaki
KEYWORDS:
Key Currency as an Insurance System; Rents from Issuing a Key Currency; International Liquidity; Sovereign Risk
JOURNAL NAME:
Theoretical Economics Letters,
Vol.3 No.1,
February
26,
2013
ABSTRACT: Although some previous studies assert that the selection of a key currency is a kind of hysteresis dominated by contingencies, historical evidence suggests that this selection depends on the following two plausible and inevitable economic factors that this study examines: overwhelming industrial power and the possession of huge amounts of foreign assets and gold. Based on the fulfillment of these economic factors, the key-currency country receives rents in return for bearing the sovereign risk and supplying sufficient liquidity to the countries within its network that accept its currency. Thus, the key-currency system can be regarded as an international liquidity provision and insurance system that relies on the economic power of the key-currency country.