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How a Key Currency Functions as an International Liquidity Provision and Insurance System

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DOI: 10.4236/tel.2013.31007    4,127 Downloads   6,895 Views   Citations
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ABSTRACT

Although some previous studies assert that the selection of a key currency is a kind of hysteresis dominated by contingencies, historical evidence suggests that this selection depends on the following two plausible and inevitable economic factors that this study examines: overwhelming industrial power and the possession of huge amounts of foreign assets and gold. Based on the fulfillment of these economic factors, the key-currency country receives rents in return for bearing the sovereign risk and supplying sufficient liquidity to the countries within its network that accept its currency. Thus, the key-currency system can be regarded as an international liquidity provision and insurance system that relies on the economic power of the key-currency country.

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

M. Otaki, "How a Key Currency Functions as an International Liquidity Provision and Insurance System," Theoretical Economics Letters, Vol. 3 No. 1, 2013, pp. 43-47. doi: 10.4236/tel.2013.31007.

References

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