International Currency Dominance

Abadi, Joseph; Fernández-Villaverde, Jesús; Sanches, Daniel R.

doi:10.21799/frbp.wp.2026.21

Working Paper

International Currency Dominance

Abstract: We present a micro-founded monetary model of the world economy to study international currency competition. Our model features both “unipolar” equilibria, with a single dominant international currency, and “multipolar” equilibria, in which multiple currencies circulate internationally. Long-run equilibria are highly history-dependent and tend towards the emergence of a dominant currency. Governments can compete to internationalize their currencies by offering attractive interest rates on their sovereign debt, but large economies have a natural advantage in ensuring the dominance of their currencies. We calibrate the model to assess the quantitative importance of these mechanisms and study the dynamics of the international monetary system under counterfactual scenarios.

JEL Classification: E42; E58; G21;

https://doi.org/10.21799/frbp.wp.2026.21