The Global Domain of the Dollar: Eight Questions

Since the late 1950s, the world has come to use the US dollar to an extent that justifies speaking of the dollar’s global domain. In a new journal article published in the Atlantic Economic Journal, Global Development Policy Center Non-Resident Senior Fellow Robert McCauley contends that the global role of the dollar remains large and suffers from neither economic instability nor unacceptable privilege. 

The rest of the world denominates much debt in US dollars, extending US monetary policy’s sway. In addition, in outstanding foreign exchange deals, many countries have undertaken to pay still more in US dollars: off-balance-sheet dollar debts buried in footnotes. Consistent with the scale of dollar debt, most of the world economic activity takes place in countries with currencies tied to, or relatively stable, against the dollar, forming a dollar zone much larger than the euro zone. Even though the dollar assets of the world (minus the United States) exceed dollar liabilities, corporate sector dollar debts seem to make dollar appreciation akin to a global tightening of credit.

Since the 1960s, claims that the dollar’s global role suffers from instability and confers great benefits on the US economy have attracted much support. However, evidence that demand for dollars from official reserve managers forces unsustainable US current account or fiscal deficits is not strong. The so-called exorbitant privilege is small or shared. In 2008 and again in 2020, the Federal Reserve (Fed) demonstrated a willingness and capacity to backstop the global domain of the dollar. Politics could constrain the Fed’s ability to backstop the growing share of the domain of the dollar accounted for by countries that are not on such friendly terms with the US.

The paper poses and answers eight questions. The first four concern the domain and economics of global dollar markets: banking, bond and foreign exchange. The fifth and sixth address widely held views, arguably myths, that the dollar’s international role is inherently unstable and is lucrative to the US economy. The seventh and eighth deal with macro policy, the Fed’s capacity to backstop the global domain of the dollar.