The Political Economy of the International Dollar Standard A Statistical Analysis of Support for the Key Currency, Victor Shih Assistant Professor Political Science Northwestern Univ. David Steinberg Postdoctoral Fellow Browne Center Univ. of Pennsylvania

Objectives Questions –Why did U.S. Dollar survive as the predominant foreign reserve currency ? –What factors encouraged states to continue using the dollar? Our Contributions –Theoretical: Central bank independence –Empirical: Statistical analysis

Alternative Explanations Export-led Development (Dooley et al) –Exporters  dislike dollar depreciation  purchase dollar reserves Large Holders (Roubini & Setser, Eichengreen) –Central banks dislike capital loss  dump the dollar –Large holders defend the dollar

The Argument: (Central Bank) Institutions Matter Institutional Logic –Determine relative power dollar supporters (exporters) & dollar opponents (capital loss) Central Bank Independence: Reduces support for the dollar –Central bank’s balance sheet –Price stability –Reduces power exporters (e.g. Henning)

Data: Dependent Variables Source: US Treasury Department surveys Data: Monthly from Mar to Aug. 2008; largest 32 holders 4 Dependent Variables: –DVHOLD: Percent change in holdings since last month –BUY10: dvhold > 0.1 –SELL10: dvhold < 0.1 –HOLDINGS: total holdings with small holders defined as HOLDINGS = 0

Data: Independent Variables Central Bank Independence: –Source: Polillo & Guillen –Expectation: Negative effect Trade Surplus: –Source: U.S. Census Bureau –Expectation: Positive effect Holding Size (Logged) –Source: Treasury Department –Expectation: Positive effect Control Variables: exchange rate; ∆ exchange rate; GDP; GDP/pop; capital controls

Conclusions Central Bank Independence: Strong support Export-led Development: Qualified support Free Riding: Mixed Support –Yes: Largest holders less likely to sell the dollar –No: Largest holders less likely to purchase dollars The Dollar’s Future? –Rapid decline unlikely –Contingent & uncertain