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Hegemonic Currencies During the Crisis: The Dollar Versus the Euro in a Cartalist Perspective
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This paper suggests that the dollar is not threatened as the hegemonic international currency, and that most analysts are incapable of understanding the resilience of the dollar, not only because they ignore the theories of monetary hegemonic stability or what, more recently, has been termed the geography of money; but also as a result of an incomplete understanding of what a monetary hegemon does. The hegemon is not required to maintain credible macroeconomic policies (i.e., fiscally contractionary policies to maintain the value of the currency), but rather to provide an asset free of the risk of default. It is argued that the current crisis in Europe illustrates why the euro is not a real contender for hegemony in the near future.
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... Krugman's analysis is based mostly on the establishment, through the invisible hand of the market (Krugman 1984, 261), of the dollar's supremacy. He provides a theoretical model, having the medium of exchange function of money as the starting point (Fields and Vernengo 2013), to explain how an international vehicle currency is chosen by market participants. In a three countries model, if one country represents a larger portion of trade, adopting its currency minimizes costs of trade for all, including trade between the two remaining countries. ...
... Eichengreen (2011a) states that a currency's value stability, credibility, and acceptability are key to maintaining the inertia effect and the establishment of the Fed lent those features to the dollar. Eichengreen, namely, overemphasizes factors pertaining to the medium of exchange function of money to the neglect of the role of the other functions of money (Fields and Vernengo 2013). ...
... In a different perspective, the monetary hegemonic theory has also tried to discuss the institutional setting that supports a currency's position. Its proponents maintain that Eichengreen's conclusions regarding the possibility of a multipolar world are erroneous due to his simplified view of money mainly as a medium of exchange and undesirable given that a hegemon brings stability (Fields and Vernengo 2013). The assertion that one monopolistic hegemonic currency is more stable than a multipolar system, however, far from uncontroversial (Gavris 2021). ...
The article discusses the internationalization of the Chinese renminbi (RMB) in light of a redefined network effects framework to incorporate an original institutionalist perspective. Contradicting common wisdom, this approach shows that rather than slowing down in 2015, the strategy to internationalize the RMB has been redirected towards the creation of network effects, thereby directly challenging the institutions—such as the petrodollar system, creditworthiness, among others—that support the United States dollar’s hegemony.
... Krugman's analysis is based mostly on the establishment, through the invisible hand of the market (Krugman 1984, 261), of the dollar's supremacy. He provides a theoretical model, having the medium of exchange function of money as the starting point (Fields and Vernengo 2013), to explain how an international vehicle currency is chosen by market participants. In a three countries model, if one country represents a larger portion of trade, adopting its currency minimizes costs of trade for all, including trade between the two remaining countries. ...
... Eichengreen (2011a) states that a currency's value stability, credibility, and acceptability are key to maintaining the inertia effect and the establishment of the Fed lent those features to the dollar. Eichengreen, namely, overemphasizes factors pertaining to the medium of exchange function of money to the neglect of the role of the other functions of money (Fields and Vernengo 2013). ...
... In a different perspective, the monetary hegemonic theory has also tried to discuss the institutional setting that supports a currency's position. Its proponents maintain that Eichengreen's conclusions regarding the possibility of a multipolar world are erroneous due to his simplified view of money mainly as a medium of exchange and undesirable given that a hegemon brings stability (Fields and Vernengo 2013). The assertion that one monopolistic hegemonic currency is more stable than a multipolar system, however, far from uncontroversial (Gavris 2021). ...
The article discusses the internationalization of the Chinese renminbi (RMB) in light of a redefined network effects framework to incorporate an original institutionalist perspective. Contradicting common wisdom, this approach shows that rather than slowing down in 2015, the strategy to internationalize the RMB has been redirected towards the creation of network effects, thereby directly challenging the institutions-such as the petrodollar system, creditworthiness, among others-that support the United States dollar's hegemony.
... Another channel through which this occurs is the decline in exports volumes of the periphery members, as discussed earlier. Lastly, a strong dollar could also speed up capital outflows from the financial assets priced in the local currencies of the non-dominant economies as the global investors' risk aversion towards domestic assets builds up and prospects of stable growth in the dominant-currency economy improve (Fields and Vernengo 2013;Gevorkyan and Kvangraven 2016). ...
... Moreover, the dollar's impact response is much stronger. One implication of this finding is the dollar acts as a safe haven given a foreign exchange liquidity shock in the periphery -a result that was documented in other studies (Todorova 2020;Fields and Vernengo 2013). Interestingly, the positive EMP shock leads to a positive response in external borrowing and the adjustment back to zero takes on average three quarters. ...
The spillover effects of strong dollar and euro, two dominant currencies, on emerging market economies (the periphery) are examined. This paper empirically studies the dominant currency shocks on foreign exchange (FX) constraint, economic growth, external debt, and inflation. Comparing the dollar shock to the euro and commodity price shocks and employing various empirical methodologies across regimes of trade invoicing and commodity dependence, this paper shows that appreciation of the trade weighted exchange rate (the dollar index) can worsen FX constraint and decrease growth in the periphery, failing to achieve the conventional macroeconomic adjustments of a competitive currency depreciation. A strong dollar reduces external debt, but a strong euro has the opposite effect. An FX-constraint shock emanating from the periphery appreciates the US dollar, affirming dollar’s safe-haven status. These findings have implications for balance of payments and exchange rate policy management for a larger group of emerging markets and developing economies.
... For the first time in history, a hegemon, the United States, had the ability to be a global debtor to provide a default-risk-free asset to facilitate global capital accumulation (Fields 2015: 146). In other words, the United States as the hegemon, has served as the source of global stability, a lender of last resort, and equally important the source of global demand (Fields and Vernengo 2012). ...
Based on Arrighi, we empirically investigate whether financialization and militarization are mutually reinforcing phenomena in the United States. Military spending during the 1950-1960s in the United States counteracted the stagnation of the monopolistic stage of capitalism. Monopoly capital was transformed into finance monopoly capital as the intensity of financial capital increased during the late 1970s in response to stagnation. Considering alternative financialization variables and the profit rate in the financial sector, and using several parametric and nonparametric methods, we found a significant relationship between financialization and militarization in the United States for 1949-2019. The results suggest that the rise in financialization is parallel to the decline in the profit rates, leading to larger military expenditure in total, but with relatively smaller share in GDP. JEL Classification: C14, E11, G32
... The key author in that tradition is Thomas Tooke, and the modern notion derives from the work of Piero Sraffa and has been developed by . 16. On the role of the dollar as the key hegemonic currency, see Fields and Vernengo (2013). 17. ...
... Those pull factors, in turn, are shaped by the macroeconomic stability and relative economic scale of the reserve currency issuing economy, predictably of its political cycles, national security and, most critically, the existence of internationally competitive, efficient, deep, and broad liquid financial markets with a variety of financial instruments open to the global economy. It is the combination of those factors that explain the US dollar's privileged position and consequent relevance to the developing nations' macroeconomics (Fields and Vernengo, 2013). ...
... The monetary system should rest on consistent political institutions. The last-resort guarantee, which is sometimes criticized on the ground that it is inconsistent with the monetary policy's credibility, has proven to be of paramount importance in times of crisis (Fields and Vernengo, 2013). The issuing economy is usually also a military power and has an active diplomacy. ...
... The sustainability of the US dollar as the dominant currency of international trade and financial transactions is a related area of research in the field of open economy macroeconomics. There is no real contender to replace the US dollar as the world's hegemonic monetary currency in the near future (Fields and Vernengo 2013). Since 2010, China has been promoting the Yuan as an international trade currency. ...
Central Asian Economies (CAEs) have diverse exchange rate policies. They have recorded higher volatility in the foreign exchange market since inception. High volatility of the transition era has drifted these economies towards partial dollarization. Monetary authorities in CAEs, (already have a challenge of maintaining monetary policy autonomy) have a gigantic task of price stability and stopping the spread of dollarization. This study is directed towards assessing the drivers and the determinants of foreign exchange market pressure in CAEs. The results, based on panel data analysis and the System GMM model, have provided useful insights about the exchange market pressure determinants particularly USD, Euro, Ruble, and Renminbi. The results show that China and Russia exchange market pressure has a negative effect on the exchange market pressure of CAEs. While the dollar index shows a positive impact on the exchange market pressure of CAEs. Overall, the findings imply that China and Russia currency appreciation results in a trade deficit across CAEs. The policy implication suggests that the floating exchange rate regime (inflation targeting regime) is not in favor of CAEs, and they must use managed-float to reduce their trade deficits.
... After the collapse of the Bretton Woods system in 1971, there was a transition to a new international financial system. It is characterized by the following key elements: (a) the shift from a system of fixed to flexible exchange rates, (b) the deregulation of domestic financial markets, (c) the integration of global financial markets through monetary and finan-cial interdependence, (d) the changes in capital controls, and (e) the globalization of intellectual property rights (Archibugi & Filippetti, 2010;Fields & Vernengo, 2013;Vermeiren, 2010). The substantial expansion of capital and financial flows and the emergence of new financial centres became central to the transition towards a new SRM that operates backwards: The US run trade and government deficits while absorbing surplus capital from abroad, which are then recycled through buying exports from its trading partners. ...
This article aims to analyze the challenges posed by the illicit financial flows (IFFs) that emerged from the consolidation and globalization of financial markets and the persistent and rising inequality of wealth and income. In a first step, we show the key dimensions behind IFFs (governance, trade, finance, taxation, monetary), which affect the multilateral order and promote new relations of dependence between the Global North and the Global South. In a second step, we analyze the cartographic representation of the developing world regarding the challenges posed by IFFs. We argue that IFFs are a subproduct of inefficient international policies and multilateral regulatory frameworks that have decreased the scope of action of nation-states and reduced the incentives for them to cooperate in certain areas of financial markets and global governance, such as international cooperation on tax and IFFs. In the article, we examine the multidimensionality of IFFs through multivariate techniques. More specifically, we use factor and cluster analysis methods based on the most recent information available between 2015 and 2020. Factor analysis reveals four main components behind this global problem: governance issues, foreign direct investment and trade-related issues, bank stability, and taxation. A clustering hierarchical solution provides four clusters of developing countries, in terms of phantom investment and trade misinvoicing, revealing the heterogeneous composition and shortcomings of the Global South. These results help understand the complexities behind IFFs and highlight the relevance of tailored actions to promote a more effective global governance system.
El control de cambios ha sido una herramienta utilizada por muchos
países del mundo tanto por condicionamientos en su balanza de pagos o
por motivos de índole política. El objetivo de este trabajo es brindar una
explicación al surgimiento de los controles cambiarios y a sus posibles
consecuencias en una economía periférica como la Argentina. Luego de
realizar una breve descripción sobre los controles cambiarios, el trabajo
se concentrará en el desarrollo de una de sus posibles consecuencias, que
es el surgimiento de un tipo de cambio paralelo y sus posibles impactos
sobre el tipo de cambio oficial para el caso argentino en el período 1946-
2015. Como conclusión, se demostrará que los Estados nacionales
pueden utilizar, dentro de ciertos márgenes (extremadamente limitados),
el control de cambios como una herramienta para lograr ciertos
objetivos de política económica (y/o distribución).
The draft European Constitution sets out in considerable detail the economic thinking of the European Union. In this chapter we reflect on macroeconomic policy in the European Union (EU); in particular, how it is embedded in the draft constitution and to make proposals for a different approach. We focus on four questions, which have particular significance for the conduct of macroeconomic policy. These are: What should the objectives of economic policy be? What is the underlying ‘model’ of the policies which are in the draft EU constitution? Should there be a federal Europe or a collection of nation-states? And how can the democratic deficit be corrected?
The chapter proceeds by putting the European Constitution in context, and then reviewing the objectives of macroeconomic policy. We then discuss critically the neo-liberal agenda underlying economic policies in the EU. We then turn our attention to the single currency and a federal Europe, and with democratising the European Central Bank (ECB). The remaining sections discuss issues on the euro exchange rate, and policies for the achievement of full employment.
'This book brings together an impressive and diverse group of authors to discuss its central theme: whether or not the dollarized international monetary system is sustainable in the context of the global economy it helped create. In addition to its uniquely well-rounded and comprehensive coverage of the issues, this lively and highly readable volume provides an accurate assessment of the lack of consensus in the current debate. A "must read" for anyone interested in currency crises and the increasing vulnerability of the dollar.' - Jane D'Arista, Director of Progams, Financial Markets Center, US. This book deals with the economic consequences of monetary integration, which has long been dominated by the Optimal Currency Area (OCA) paradigm. In this model, money is perceived as having developed from a private sector cost minimization process to facilitate transactions. Not surprisingly, the book argues, the main advantage of monetary integration in the OCA context is the reduction of transaction costs, yet the validity of OCA to analyze processes of monetary integration seems to be limited at best
In the debate on monetary policy strategies on the two sides of the Atlantic, it is now almost commonplace to contrast the Fed and the European Central Bank (ECB) by pointing out the flexibility and capacity to adjust of the former and the rigidity and extreme caution of the latter, and its obsession with low inflation. In looking at the foundations of the two banks' strategies, however, we do not find differences that can provide a simple explanation for their divergent behavior, nor, above all, for the very different economic performance in the United States and Euroland in recent years. Not surprisingly, both central banks share the same conviction that money is neutral in the long run, and even their short-term policies are based on similar fundamental principles. The two policy approaches really differ only in terms of implementation, timing, competence, and so on, but not in terms of the underlying theoretical orientation. We then draw the conclusion that monetary policy cannot represent a significant variable in the explanation of the different economic performances of Euroland and the United States. The two economic areas' differences must be explained by considering other factors, among which the most important is fiscal policy.