1 / 14

CURRENCY AND STATE POWER

This analysis investigates the effects of international currency (IC) on state power, focusing on three crucial roles: trade, investment, and reserve dynamics. It disaggregates the impacts of these roles on a state's monetary autonomy and influence. While conventional wisdom suggests that issuing an IC increases state power, this study explores specific causal pathways and interdependencies among roles. The findings highlight that while all roles generate economic benefits, significant political benefits primarily derive from the store-of-value functions, emphasizing the importance of commitment to financial market development and broader currency use in trade.

donoma
Download Presentation

CURRENCY AND STATE POWER

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. CURRENCY AND STATE POWER Benjamin J. Cohen University of California, Santa Barbara

  2. SUMMARY • Question: What is the effect of an int’l currency (IC) on state power? • Analytical strategy: Disaggregate the roles of an IC –> 3 questions: • What is the effect of each role alone? • Are there interdependencies among roles? • What are their relative or cumulative impacts? • Conclusion: Three roles are paramount – in financial markets, trade, and central-bank reserves

  3. CONTEXT Conventional wisdom: an IC increases state power. But what are the specific causal pathways? To answer, we must understand – • Meaning(s) of state power • Implications of separate roles

  4. STATE POWER • Monetary power: a complex phenomenon. • Two issues • Autonomy vs. influence • Autonomy = capacity to delay or deflect costs of balance-of-payments adjustment • Influence derives from autonomy • Influence may be passive or active • Relations as a source of power • Relevance of asymmetries, dependencies • Influence as a function of centrality of position

  5. THE AGENDA • What is the effect of an IC on an issuing state’s network position? • What is the effect on the state’s monetary autonomy? • What is the effect on the state’s capacity for influence? • What is the likelihood that influence will be actualized?

  6. MONEY AND POWER • Conventional wisdom: an IC yields benefits to the issuing country • Seigniorage • Macroeconomic flexibility • Reputation • Leverage • Problem: What are the specific causal pathways? • Answer: need to disaggregate the separate roles of an IC

  7. ROLES OF AN INT’L CURRENCY • Private level (markets) • Forex trading (medium of exchange) • Trade invoicing (m/e, unit of account) • Investment (store of value) • Official level (policy) • Intervention currency (m/e) • Exchange-rate anchor (u/a) • Reserve currency (s/v)

  8. THE CURRENCY PYRAMID • “Top” currency (US dollar) • Universal in scope (all six roles) • Universal in domain (the globe) • “Patrician” currencies (euro, yen) • Limited number of roles • Mostly regional • “Elite” currencies (sterling, Swiss franc, Canadian dollar, etc.) • Limited scope and domain

  9. PRIVATE LEVEL • Foreign-exchange trading • Centrality yields economic benefits but no political gain – autonomy unaffected • Trade invoicing and settlement • Similar: economic benefits but autonomy unaffected • Financial markets (investment role) • Autonomy is enhanced (greater macroeconomic flexibility) • But difficult to translate directly into influence

  10. OFFICIAL LEVEL • Intervention currency • Centrality yields economic benefits but no political gain – autonomy unaffected • Exchange-rate anchor • Similar: economic benefits but autonomy unaffected • Reserve currency (reserve role) • Autonomy is enhanced (greater macroeconomic flexibility) • May be possible to translate directly into influence

  11. INFERENCES • All six roles generate economic benefits • Political benefits derive only from the store-of-value roles (investment, reserve) • But this does not mean that only the s/v roles matter. Why? Because of interdependencies among roles

  12. INTERDEPENDENCIES • Is either s/v role (investment, reserve) dependent on any of the m/e or u/a roles? • Private level: No • Appeal as s/v depends on financial markets, not use for forex trading or trade invoicing • Official level: Yes • Politics apart, choice of reserve currency tends to reflect patterns of currency choice in trade relationships • Inference: Three roles matter critically – trade, financial, and reserve

  13. RELATIVE, CUMULATIVE IMPACTS • Of the three (trade, financial, reserve), the investment role (alone) contributes least to state power • But the investment role is critical in paving the way for a reserve role • The link between the two? The trade role

  14. CONCLUSIONS • Three roles are critical: trade, investment, and reserve roles • The two s/v roles enhance autonomy, creating a capacity for influence • Alone, the investment role has little impact • But a reserve role is unlikely without, first, an investment role • The link between the two is the trade role • Practical lesson: For a government that wants to enhance its monetary power (autonomy, influence), there are two critical imperatives: • Commitment to broad financial-market development • Commitment to wider use of the national currency in trade invoicing and settlement

More Related