Banking, Trade, and the Making of a Dominant Currency 1 / 30

Transcription

1 Banking, Trade, and the Making of a Dominant Currency Gita Gopinath Harvard Jeremy Stein Harvard 1 / 30

2 What is a Dominant Currency? 1 Trade invoicing 2 / 30

3 What is a Dominant Currency? 1 Trade invoicing Dollar Invoicing in World Imports Imports from U.S. = 4.7 Euro Invoicing in World Imports Imports from Euro Area = / 30

4 What is a Dominant Currency? 1 Trade invoicing Dollar Invoicing in World Imports Imports from U.S. = 4.7 Euro Invoicing in World Imports Imports from Euro Area = 1.2 Prices rigid in currency of invoicing 2 / 30

5 What is a Dominant Currency? 1 Trade invoicing Dollar Invoicing in World Imports Imports from U.S. = 4.7 Euro Invoicing in World Imports Imports from Euro Area = 1.2 Prices rigid in currency of invoicing 2 International bank funding and corporate borrowing Dollar liabilities of non-u.s. banks comparable to U.S. banks 62% of foreign currency local liabilities of banks denominated in dollars Currency mismatch 2 / 30

6 What is a Dominant Currency? 1 Trade invoicing Dollar Invoicing in World Imports Imports from U.S. = 4.7 Euro Invoicing in World Imports Imports from Euro Area = 1.2 Prices rigid in currency of invoicing 2 International bank funding and corporate borrowing Dollar liabilities of non-u.s. banks comparable to U.S. banks 62% of foreign currency local liabilities of banks denominated in dollars Currency mismatch 3 Central bank reserves Dollar: 64%; Euro: 20%; Yen: 4% 2 / 30

7 What is a Dominant Currency? 1 Trade invoicing Dollar Invoicing in World Imports Imports from U.S. = 4.7 Euro Invoicing in World Imports Imports from Euro Area = 1.2 Prices rigid in currency of invoicing 2 International bank funding and corporate borrowing Dollar liabilities of non-u.s. banks comparable to U.S. banks 62% of foreign currency local liabilities of banks denominated in dollars Currency mismatch 3 Central bank reserves Dollar: 64%; Euro: 20%; Yen: 4% 4 Exorbitant Privilege Violation of UIP: Dollar risk-free assets pay lower expected returns (in a common currency) 2 / 30

8 What we do 1 Unified theory for dominance in trade invoicing and finance 2 Strategic complementarity of unit of account and store of value 3 Dominant currency, despite multiple candidates 4 Currency mismatch and exorbitant privilege 3 / 30

9 What we do 1 Unified theory for dominance in trade invoicing and finance 2 Strategic complementarity of unit of account and store of value 3 Dominant currency, despite multiple candidates 4 Currency mismatch and exorbitant privilege Eichengreen (2010): experience suggests that the logical sequencing of steps in internationalizing a currency is: first, encouraging its use in invoicing and settling trade; second, encouraging its use in private financial transactions; third encouraging its use by central banks and governments as a form in which to hold private reserves. 3 / 30

10 Main Idea High $ invoicing

11 Main Idea High $ invoicing High HH/firms $ expenses

12 Main Idea High $ invoicing High HH/firms $ expenses High demand for $ safe assets

13 Main Idea High $ invoicing Low r on $ safe assets High HH/firms $ expenses High demand for $ safe assets

14 Main Idea High $ invoicing Low r on $ safe assets High HH/firms $ expenses High demand for $ safe assets 4 / 30

15 Model: Exogenous invoicing Two countries: U.S and an EM. Two dates: 0 and 1 Two agents: Importers/Savers and Banks/Borrowers 5 / 30

16 Model: Exogenous invoicing Two countries: U.S and an EM. Two dates: 0 and 1 Two agents: Importers/Savers and Banks/Borrowers Importers max C 0 + βe 0 W 1 + θ log(m), (P1) C 0 W 0 Q h D h E 0 Q $ D $ Q R A R W 1 = D h + E 1 D $ + ξa R, Preference for safe money-like assets, θ > 0 M = ( D α h h Dα $ $ ) 1 α h +α $ Stein (2012), Krishnamurthy and Vissing-Jorgensen (2012), Sunderam (2014), Greenwood, Hanson and Stein (2015), Nagel (2016) Price in invoice currency set at time 0 and sticky through time 1 5 / 30

17 Model: Exogenous invoicing go α h Q h = β + θ (α h + α $ )D h α $ Q $ = β + θ (α h + α $ )D $ Q R = β E 0 (E 1 ) = E 0 = 1; E 0 (ξ) = 1 6 / 30

18 Model: Exogenous invoicing EM Banks (agglomeration of banks and borrowing firms) N local currency risky projects 7 / 30

19 Model: Exogenous invoicing EM Banks (agglomeration of banks and borrowing firms) N local currency risky projects Safe local claims B h ; safe dollar claims B $ ; risky local bonds B R 7 / 30

20 Model: Exogenous invoicing EM Banks (agglomeration of banks and borrowing firms) N local currency risky projects Safe local claims B h ; safe dollar claims B $ ; risky local bonds B R subject to, max E 0 [γn B h EB $ ξb R ] B h,b $,B R Q h B h + Q $ B $ + Q R B R N Limits to safe asset creation γ L : Worst case payout of project ĒB $ + B h γ L N Ē: Worst case value of EM currency Comparative disadvantage in manufacturing dollar safe claims E 0 γ = 1, E 0 ξ = 1 7 / 30

21 Model: Exogenous invoicing and banking market structure UIP Violation & Exorbitant Privilege: Q $ > Q h > Q R Q $ β Q h β = Ē 8 / 30

22 Model: Exogenous invoicing and banking market structure UIP Violation & Exorbitant Privilege: Q $ > Q h > Q R Q $ β Q h β = Ē Fund with $ deposits if cheaper than funding with h deposits. 8 / 30

23 Model: Exogenous invoicing and banking market structure UIP Violation & Exorbitant Privilege: Q $ > Q h > Q R Q $ β Q h β = Ē Fund with $ deposits if cheaper than funding with h deposits. Market clearing D $ =B $ + X $ }{{} exogenous,us D h = B h 8 / 30

24 Model: Invoicing Shares, UIP Deviations, Dollar Borrowing Walking up a supply curve Q $ Q h B $ θ(ē 1) (γ L N+ĒX $ ) ᾱ $ α $ ᾱ $ α $ (a) Q $ Q h (b) B $ ᾱ $ = α hēx $ γ L N High dollar invoicing = low return on safe dollar claims 9 / 30

25 Model: Endogenous Invoicing Invoice fraction η of N in dollars (exports) max E 0 [γn 0 + γ(1 η)n + EγηN B h EB $ ξb R φ2 ] B h,b $,B R,η Nη2 s.t., Q h B h + Q $ B $ + Q R B R N + N 0 ĒB $ + B h γ L N 0 + (1 η)γ L N + Ēηγ L N B h γ L N 0 + (1 η)γ L N Comparative disadvantage in manufacturing $ safe claims Currency mismatch: Ē Invoicing costs: φ (ηn) 2 2 N ; Proxies for risk-aversion of ultimate owners of exporting firms. 10 / 30

26 Model: Endogenous Invoicing Shares Dollar premium (DP): Invoicing choice (IC): Q $ Q h = β ( µ(η)(ē 1) κ ) η = γ L βφ (Q $ Q h ) Q $ Q IC DP η optimal η 11 / 30

27 Model: Endogenous Invoicing Shares Dollar premium (DP): Invoicing choice (IC): Q $ Q h = β ( µ(η)(ē 1) κ ) η = γ L βφ (Q $ Q h ) Q $ Q IC DP η optimal η Why invoice in dollars? To access cheap dollar financing 11 / 30

28 Endogenous Invoice Shares and Multiple Equilibria Continuum of EMs and US Safe asset demand only in own local currency and in dollars M i = ( D α hi hi D α ) 1 $i α hi +α $i $i Invoicing decisions in j effect invoicing shares in i α $i a + b η j dj j i a > 0: share of U.S. goods b > 0: share of goods from other EMs; a + b < 1 Integrated markets for dollar deposits, segmented markets for EM currencies. 12 / 30

29 Simultaneous determination of invoicing and banking Multiple Equilibria with varying degrees of dollar invoicing η η a ā a 13 / 30

30 Simultaneous determination of invoicing and banking Multiple Equilibria with varying degrees of dollar invoicing Q $ Q h βφ γ L η a ā a θ γ L (N+N 0) 14 / 30

31 Dollar vs. Euro: Emergence of a dominant currency Two global currencies: Dollar and Euro EM Importers/Savers M i = ( D α hi hi D α $i $i D α ) 1 ei αi ei α $i = a + b η $j dj α ei = a + b j i j i η ej dj 15 / 30

32 Dollar vs. Euro: Emergence of a dominant currency Two global currencies: Dollar and Euro EM Importers/Savers M i = ( D α hi hi D α $i $i D α ) 1 ei αi ei α $i = a + b η $j dj α ei = a + b j i j i η ej dj Symmetry: Ē ei = Ē $i = Ē Integrated markets for dollar and euro deposits 15 / 30

33 Dollar vs. Euro: Emergence of a dominant currency Invoicing decision Market-clearing: η $i = γ L βφ (Q $ Q hi ) cη ei η ei = γ L βφ (Q e Q hi ) cη $i D hi = B hi i A Ri = B Ri i D $i = B $i + X i i D ei = B ei + X i i 16 / 30

34 Dollar vs. Euro: Emergence of a dominant currency Three possible equilibria No global currency (symmetric) η $ = η e = 0, B $ = B e = 0 Single/dominant global currency (asymmetric) η $ > 0, η e = 0, B $ > 0, B e = 0 Multiple global currencies (symmetric) η $ > 0, η e > 0, B $ > 0, B e > 0 17 / 30

35 Numerical Example Parameter N N 0 X α h φ θ β γ L Ē b c Value / 30

36 Dominance in Trade Invoicing 19 / 30

37 Dominance in Banking 20 / 30

38 Currency Mismatch 21 / 30

39 Exorbitant Privilege 22 / 30

40 Comments Which currency dominates? The role of history Pre-1999, a $ >> a e, Dollar only dominant currency Post-1999, closer in size, but history picks the dollar Can take a long time to reverse 23 / 30

41 Comments Which currency dominates? The role of history Pre-1999, a $ >> a e, Dollar only dominant currency Post-1999, closer in size, but history picks the dollar Can take a long time to reverse Why dollarization of central bank reserves? Lender of last resort of banks Central bank asset mix mirrors commercial banks liability structure Obstfeld, Shambaugh and Taylor (2010) 23 / 30

42 Data: Relation between trade invoicing and bank liabilities D $,i = α $,i Qe β D e,i α e,i Q $ β 24 / 30

43 Data: Relation between trade invoicing and bank liabilities D $,i = α $,i Qe β D e,i α e,i Q $ β Dollar share in bank liabilities CH SE DKNO TR GB AU KR JP CA Dollar share in trade invoicing R-squared= 0.72 BIS Locational Banking Statistics, Local Liabilities 24 / 30

44 Data: Relation between trade invoicing and bank liabilities Dollar share in bank liabilities (deposits and loans, non-banks) CH DK SE Dollar share in trade invoicing R-squared= 0.82 GB AU KR CA JP BIS Locational Banking Statistics, Local liabilities 25 / 30

45 Conclusion 1 Unified theory for dominance in trade invoicing and finance Invoice in dollars because dollar financing cheap Dollar financing cheap because of invoicing in dollars 2 Strategic complementarity of unit of account and store of value 3 Dominant currency, despite multiple candidates 4 Currency mismatch and exorbitant privilege 26 / 30

46 Conclusion 1 Unified theory for dominance in trade invoicing and finance Invoice in dollars because dollar financing cheap Dollar financing cheap because of invoicing in dollars 2 Strategic complementarity of unit of account and store of value 3 Dominant currency, despite multiple candidates 4 Currency mismatch and exorbitant privilege China s Renminbi Share as settlement currency: 0% in 2010, 25% in 2015 Second most widely used currency in global trade finance 26 / 30

47 Micro-foundation for P1 back Risk-Neutral Investors: max C C0 n 0 n + βe 0 C1, n,cn 1,Dn h,dn $,An R (P2) subject to: C n 0 W n 0 Q h D n h E 0Q $ D n $ Q RA n R C 1 = D n h + E 1D n $ + ξan R, Q R = β, A R > 0 D n h = Dn $ = 0 if Q h > β, Q $ > β 27 / 30

48 Micro-foundation for P1 back Risk-Averse Importers: max E 0 U(C 1 ), C 1,D h,d $ subject to: (P3) W Q h D h E 0 Q $ D $ P 1 C 1 D h + E 1 D $, where the consumption aggregator and price level are given by, C = C 1 α h C α $ P = P1 α h (E 1 P $ ) α α α (1 α) 1 α = E1 α α α (1 α) 1 α = νeα 1 and α = α $ α h +α $ 28 / 30

49 Micro-foundation for P1 back (c) (d) Figure: Relative demand for dollar deposits (in partial equilibrium) 29 / 30

50 Micro-foundation for P1 back (a) (b) Figure: Full equilibrium 30 / 30