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CURRENCY AND STATE POWER

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

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CURRENCY AND STATE POWER

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  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

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