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



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.


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


  1. Aizenman, Joshua and Jaewoo Lee (2007) ‘International Reserves: Precautionary Versus Mercantilist Views, Theory and Evidence’, Open Economies Review 18(2): 191–214.CrossRefGoogle Scholar
  2. Abbas, Mahmud (2007) ‘Qatar says Will Not Automatically Track Fed Moves’, Reuters, 4 November, available from (accessed 05 April, 2013).
  3. Andrews, David M. (2006) ‘Monetary Policy Coordination and Hierarchy’, in David M. Andrews, ed., International Monetary Power, 91–114, Ithaca: Cornell University Press.Google Scholar
  4. Bearce, David H. (2007) ‘Monetary Divergence: Domestic Policy Autonomy in the Post-Bretton Woods Era’, Ann Arbor: University of Michigan Press.CrossRefGoogle Scholar
  5. Beck, Nathaniel L., Jonathan N. Katz and Richard Tucker (1998) ‘Taking Time Seriously: Time-Series-Cross-Section Analysis with a Binary Dependent Variable’, American Journal of Political Science 42(4): 1260–88.CrossRefGoogle Scholar
  6. Beck, Nathaniel L. and Johnathan N. Katz (1995) ‘What to do (and not to do), with time-series cross-section data’, American Political Science Review 89(3): 634–47.CrossRefGoogle Scholar
  7. Beckworth, David and Cristopher Crowe (2012) ‘The Great Liquidity Boom and the Monetary Superpower Hypothesis’, in David Beckworth, ed., Boom and Bust in Banking: Causes and Cures of the Great Recession, 95–126, Oakland, CA: The Independent Institute.Google Scholar
  8. Belke, Ansgar and Daniel Gros (2005) ‘Asymmetries in Transatlantic Monetary Policy-Making: Does the ECB Follow the Fed?’, Journal of Common Market Studies 43(5): 921–46.CrossRefGoogle Scholar
  9. Bartels, Brandon (2008) ‘Beyond “Fixed versus Random Effects”: A Framework for Improving Substantive and Statistical Analysis of Panel, Time-Series Cross-Sectional and Multilevel Data.’, Society for Political Methodology, available from (accessed on 23 July, 2015).
  10. Bell, Andrew and Kelvyn Jones (2015) ‘Explaining Fixed Effects: Random Effects Modelling of Time-Series Cross-Sectional and Panel Data’, Political Science Research and Methods 3(1): 133–53.CrossRefGoogle Scholar
  11. Bond, Stephen R. (2002) ‘Dynamic Panel Data Models: A Guide to Micro Data Methods and Practice’, Portuguese Economic Journal 1: 141–62.Google Scholar
  12. Bordo, Michael D. (2003) ‘Exchange rate regime choice in historical perspective’, National Bureau of Economic Research Working Paper Series No. 9654.Google Scholar
  13. Bordo, Michael D. and Marc Flandreau (2003) ‘Core, Periphery, Exchange Rate Regimes and Globalization’, in Michael D. Bordo, Alan M. Taylor, and Jeffrey G. Williamson eds, Globalization in Historical Perspective, 417–72, Chicago and London: University of Chicago Press.CrossRefGoogle Scholar
  14. Bowles, Paul and Baotai Wang (2008) ‘The rocky road ahead: China, the US and the future of the dollar’, Review of International Political Economy 15(3): 335–53.CrossRefGoogle Scholar
  15. Broz, Lawrence J. (2002) ‘Political System Transparency and Monetary Commitment Regimes’, International Organization 56(4): 861–87.CrossRefGoogle Scholar
  16. Cappella, Rosella (2013) ‘Reserve Currency and Military Power: Lessons from the Sterling Era and the Future of America’s Military Might’, unpublished paper.Google Scholar
  17. Cappella, Rosella (2014) ‘Cash Guns and Power: How States Pay for Wars’, unpublished manuscript.Google Scholar
  18. Çelik, Sadullah and Deniz, Pinar (2010) ‘The leading effects of Fed funds target interest rate’, Banks and Bank System 5(1): 65–70.Google Scholar
  19. Chinn, Menzie D. and Hiro Ito (2008) ‘A New Measure of Financial Openness’, Journal of Comparative Policy Analysis 10(3): 309–22.CrossRefGoogle Scholar
  20. Cohen, Benjamin J. (1998) The Geography of Money, Ithaca: Cornell University Press.Google Scholar
  21. Cohen, Benjamin J. (2006) ‘The Macrofoundations of Monetary Power’, in David M. Andrews, ed., International Monetary Power, 31–50, Ithaca: Cornell University Press.Google Scholar
  22. Cohen, Benjamin J. (2008) ‘The international monetary system: diffusion and ambiguity’, International Affairs 84(3): 455–70.CrossRefGoogle Scholar
  23. Cohen, Benjamin J. (2009) ‘Toward a Leaderless Currency System’, in Jonathan Kirshner and Eric Helleiner, eds, The Future of the Dollar, 142–63, Ithaca: Cornell University Press.Google Scholar
  24. Cohen, Benjamin J. (2011) The Future of Global Currency, New York: Routledge.Google Scholar
  25. Cohen, Benjamin J. (2012) ‘The Benefits and Costs of an International Currency: Getting the Calculus Right’, Open Economies Review 23(1): 13–31.CrossRefGoogle Scholar
  26. Cohen, Benjamin J. and Tom M. Benney (2014) ‘What Does the International Currency System Really Look Like?’, Review of International Political Economy 21(5): 1017–41.CrossRefGoogle Scholar
  27. Dieleman, Joseph L. and Tara Templin (2014) ‘Random-Effects, Fixed-Effects and the within-between Specification for Clustered Data in Observational Health Studies: A Simulation Study’, PLoS ONE 9(10): 1–17.CrossRefGoogle Scholar
  28. Dooley, Michael P., David Folkerts-Landau and Peter Garber (2004) ‘The Revived Bretton Woods System’, International Journal of Finance & Economics 9(4): 307–13.CrossRefGoogle Scholar
  29. Eichengreen, Berry (2011) Exorbitant Privilege: the Rise and Fall of the Dollar, Oxford: Oxford University Press.Google Scholar
  30. Fields, David and Matìas Vernengo (2011), ‘Hegemonic Currencies during the Crisis: The Dollar versus the Euro in a Cartalist Perspective’, Levy Economics Institute Working Paper Collection No. 666.Google Scholar
  31. Fleming, Marcus J. (1962) ‘Policies Under Fixed Financial Domestic Rates and Under Floating Exchange’, IMF Staff Papers 9(3): 169–380.Google Scholar
  32. Gavin, Francis (2003) ‘Ideas, Power and the Politics of U.S. International Monetary Policy during the 1960s’, in Jonathan Kirshner, ed., Monetary Orders. Ambiguous Economics, Ubiquitous Politics, 195–217, Ithaca: Cornell University Press.Google Scholar
  33. Gilpin, Robert and Jean M. Gilpin (1987) The Political Economy of International Relations, Princeton: Princeton University Press.CrossRefGoogle Scholar
  34. Gray, Colin (2013) ‘Responding to a Monetary Superpower: Investigating the Behavioral Spillovers of U.S. Monetary Policy’, Atlantic Economic Journal 41(2): 173–84.CrossRefGoogle Scholar
  35. Hanrieder, Wolfram F. (1989), Germany, America, Europe: forty years of German foreign policy, New Haven: Yale University Press.Google Scholar
  36. Helleiner, Eric (2009) ‘Enduring Top Currency, Fragile Negotiated Currency: Politics and the Dollar’s International Role’, in Jonathan Kirshner and Eric Helleiner, eds, The Future of the Dollar, 69–87, Ithaca: Cornell University Press.Google Scholar
  37. Helleiner, Eric (2013), ‘Reluctant Monetary Leaders? The New Politics of International Currencies, The Brics and Asia’, Currency Internationalization and Monetary Reform, July, paper No. 6.Google Scholar
  38. Helleiner, Eric and Jonathan Kirshner (2009) ‘The future of the Dollar: Whither the Key Currency?’, in Jonathan Kirshner and Eric Helleiner, eds, The Future of the Dollar, 1–23, Ithaca: Cornell University Press.Google Scholar
  39. Keele, Luke and Nathan J. Kelly (2006) ‘Dynamic models for dynamic theories: The ins and outs of lagged dependent variables’, Political Analysis 14(2): 186–200.CrossRefGoogle Scholar
  40. Kelly, Janet (1977), ‘International Monetary Systems and National Security’, in Klaus E. Knorr and Fredric N. Trager, eds, Economic Issues and National Security, 231–58, Kansas City: University Press of Kansas.Google Scholar
  41. Kirshner, Jonathan (1995) Currency and coercion: the political economy of international monetary power, Princeton: Princeton University Press.Google Scholar
  42. Kirshner, Jonathan (2008) ‘Dollar primacy and American power: What’s at stake?’, Review of International Political Economy 15(3): 418–38.CrossRefGoogle Scholar
  43. Kirshner, Jonathan (2014) ‘Same as It Ever Was? Continuity and Change in the International Monetary System’, Review of International Political Economy 21(5): 1007–16.CrossRefGoogle Scholar
  44. Knorr, Klaus E. (1975) The Power of Nations: The Political Economy of International Relations, New York: Basic Books.Google Scholar
  45. Knot, Klass H. W. (1998) ‘The fundamental determinants of interest rate differentials in the ERM’, Applied Economics 30(2): 165–76.CrossRefGoogle Scholar
  46. Leblang, David A. (1999), ‘Domestic Political Institutions and Exchange Rate Commitments in the Developing World’, International Studies Quarterly 43(4): 599–620.CrossRefGoogle Scholar
  47. Leyland, Alastair H. (2010) ‘No Quick Fix: Understanding the Difference between Fixed and Random Effect Models’, Journal of Epidemiology and Community Health 64(12): 1027–28.CrossRefGoogle Scholar
  48. Levy-Yeyati, Eduardo, Federico Sturzenegger and Pablo Gluzmann (2013) ‘Fear of Appreciation’, Journal of Development 101: 233–47.Google Scholar
  49. Lin, Shu and Haichun Ye (2011) ‘The role of financial development in exchange rate regime choices’, Journal of International Money and Finance 30(4): 641–59.CrossRefGoogle Scholar
  50. Meissner, Christopher M., and Nienke Oomes. (2008) ‘Why Do Countries Peg the Way They Peg? The Determinants of Anchor Currency Choice’ IMF Working Paper 132.Google Scholar
  51. Mastanduno, Michael (1998) ‘Economics and security in statecraft and scholarship’, International Organization 52(4): 825–54.CrossRefGoogle Scholar
  52. McKinnon, Ronald I. (2009) ‘U.S. Current Account Deficits and the Dollar Standard’s Sustainability: A Monetary Approach’, in Jonathan Kirshner and Eric Helleiner, eds, The Future of the Dollar, 45–68, Ithaca: Cornell University Press.Google Scholar
  53. McNamara, Kathleen R. (2008) ‘A rivalry in the making? The Euro and international monetary power’, Review of International Political Economy 15(3): 439–59.CrossRefGoogle Scholar
  54. Mundell, Robert A. (1961) ‘A theory of optimum currency areas’, American Economic Review 51(4): 657–65.Google Scholar
  55. Mundell, Robert A. (1963) ‘Capital mobility and stabilization policy under fixed and flexible exchange rates’, Canadian Journal of Economic and Political Science 29(4): 475–85.CrossRefGoogle Scholar
  56. Murphy, Taggart R. (2006) ‘East Asia’s Dollars’, New Left Review 40: 39–64.Google Scholar
  57. Norrlof, Carla (2010) America’s global advantage: US hegemony and international cooperation, Cambridge: Cambridge University Press.CrossRefGoogle Scholar
  58. Norrlof, Carla (2014) ‘Dollar hegemony: A power analysis’, Review of International Political Economy 21(5): 1042–70.CrossRefGoogle Scholar
  59. Olson, Mancur (1965) The Logic of Collective Action: Public Goods and the Theory of Groups, Cambridge: Harvard University Press.Google Scholar
  60. Olson, Mancur and Richard Zeckhauser (1966), ‘An Economic Theory of Alliances’, Review of Economics and Statistics 48: 266–79.CrossRefGoogle Scholar
  61. Otero-Iglesias, Miguel and Federico Steinberg (2013) ‘Is the Dollar Becoming a Negotiated Currency? Evidence from the Emerging Markets’, New Political Economy 18(3): 309–36.CrossRefGoogle Scholar
  62. Plümper, Thomas and Eric Neumayer (2011) ‘Fear of Floating and de Facto Exchange Rate Pegs with Multiple Key Currencies’, International Studies Quarterly 55(4): 1121–42.CrossRefGoogle Scholar
  63. Rickards, James (2011) Currency Wars: The Making of the Next Global Crisis, New York: Portfolio/Penguin.Google Scholar
  64. Setser, Bred W. (2008) ‘Sovereign Wealth and Sovereign Power’, Council on Foreign Relations – Special Report No. 37.Google Scholar
  65. Spiro, David E. (2012), ‘Embedded Neo-Mercantilism in the Post-Bretton Woods Economy: Balance of Payments Adjustment from Petrodollars to Sinodollars’, paper presented at the annual meeting of the International Studies Association, San Diego, 1–4 April.Google Scholar
  66. Steinberg, David A. and Victor C. Shih (2012), ‘Interest Group Influence in Authoritarian States: The Political Determinants of Chinese Exchange Rate Policy’, Comparative Political Studies 45(11): 1405–34.CrossRefGoogle Scholar
  67. Steinberg, David A. and Stefanie Walter (2012) ‘The Political Economy of Exchange-Rate Policy’, in G. J. Caprio, ed., Handbook of Safeguarding Global Financial Stability: Political, Social, Cultural and Economic Theories and Models, second edition, 27–36, Amsterdam: Elsevier.Google Scholar
  68. Steiner, Andreas (2013) ‘The Accumulation of Foreign Exchange by Central Banks: Fear of Capital Mobility?’, Journal of Macroeconomics 38: 409–27.CrossRefGoogle Scholar
  69. Stokes, David (2014) ‘Achilles’ Deal: Dollar Decline and US Grand Strategy After the Crisis’, Review of International Political Economy 21(5): 1071–94.CrossRefGoogle Scholar
  70. Strange, Susan (1971) ‘The Politics of International Currencies’, World Politics 23(2): 215–31.CrossRefGoogle Scholar
  71. Strange, Susan (1987) ‘The Persistent Myth of Lost Hegemony’, International Organization 41(4): 551–74.CrossRefGoogle Scholar
  72. Taylor, John B. (1993) ‘Discretion versus policy rules in practice’, Carnegie-Rochester Conference Series on Public Policy 39: 195–214.CrossRefGoogle Scholar
  73. Truman, Edwin M. (2010) ‘The International Monetary System and Global Imbalances’, Economics Management Financial Markets 5: 1–10.Google Scholar
  74. US Department of State (2008) ‘Oman Central Bank Remains Firm on Dollar Peg – Cable MUSCAT 000293’, 19 April, available at (accessed 15 May, 2013).
  75. Vermeiren, Martin (2010) ‘The Global Imbalances and the Contradictions of U.S. Monetary Hegemony’, Journal of International Relations and Development 13: 105–35.CrossRefGoogle Scholar
  76. Vermeiren, Martin (2013) ‘The Crisis of US Monetary Hegemony and Global Economic Adjustment’, Globalizations 10: 245–59.CrossRefGoogle Scholar
  77. Webb, Michael C. (1995) The Political Economy of Policy Coordination. International Adjustment since 1945, Ithaca: Cornell University Press.Google Scholar
  78. Zimmerman, Hubert (2002), Money and Security: Troops, Monetary Policy and West Germany’s Relations with the United States and Britain, 19501971, Cambridge: Cambridge University Press.CrossRefGoogle Scholar

Copyright information

© Macmillan Publishers Ltd 2017

Authors and Affiliations

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

Personalised recommendations