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The entrapment of major holders: how big financial players shape the future of the US dollar

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Abstract

The global dominance of the US dollar as the key currency of the post-Bretton Woods monetary system rests on the cooperation of private financial markets as well as foreign central banks. The latter, in particular, avoid the collapse of the dollar’s value in periods of economic distress and bearish market cycles using two policies. One is the accumulation of more-than-necessary foreign exchange reserves denominated in US dollars. The second is following the Federal Reserve’s interest-rate policy to assure a steady flow of investments towards the American market. This research focuses on this second practice in order to improve our still insufficient understanding of the actual drivers of foreign countries’ reaction to the Fed’s policy moves. The article contributes to the existing debates in international political economy regarding the determinants of macroeconomic adjustments among interdependent economies. Specifically, it assesses the role played, in this respect, by the relative size of a country’s stock of foreign assets. According to the findings, corroborated through a within-between regression over a large panel of countries, in economies holding relatively less dollar-denominated securities monetary authorities are less prone to sacrifice an autonomous governance of interest rates for cushioning the consequences of imbalances in the global payment system.

Keywords

macroeconomic imbalances monetary followership monetary leadership monetary power small powers US dollar 

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Copyright information

© Macmillan Publishers Ltd 2017

Authors and Affiliations

  1. 1.Department of International, Legal, Historical and Political StudiesUniversity of MilanMilanItaly

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