Dollar

The US dollar has been serving as the only international key currency since the end of the Second World War. However, with its transformation in a pure fiat money after the Nixon Shock, the stability and the value of the American currency became contingent on the benign coordination of foreign central banks. In particular, the deepening of the US payment deficit from the mid 1990’s magnified henceforward the importance of creditor countries in cushioning the hard lending of the dollar on international currency markets. Although monetary economics has produced a wide literature on the ideal welfare-maximising rules for central bank policy coordination, many countries began diverging, especially in the 2000’s, from the best-established pattern of monetary policy-making to follow the Federal Reserve on an increasingly unconventional path. So far, though, little research has explored the question of the possible international political sources of this “great deviation”. In the present paper, I test both politically-relevant variables and economic drivers of monetary policy on a panel of 84 countries from 1983 to 2012, assessing their impact on interest-rate differentials vis à vis the Federal Reserve. Results show that economically consistent predictors of monetary policy behaviour are, ceteris paribus, less relevant for debtor countries than for creditor ones, indicating a more autonomous (i.e. self-oriented) monetary policy in this group of countries. Nonetheless, surplus states are prone to direct their monetary policy to the financing of the US current account deficit when involved in a military alliance with Washington, providing they have enough financial power to affect the price of the dollar in the foreign exchange market.

Despite growing global concerns regarding the reliability of the American economy in general and the Dollar as a Negotiated Currency in particular, US-shaped regime of international finance will survive the present difficulties. This is mainly due to the fact that China would be predisposed to maintain its backing of the US Dollar, not to harm it, because it staked a massive economic and political capital in that. Beijing has so far persisted in assisting the global value of the US Dollar (sacrificing considerable sums of economic return), which is an apt move to beef up the American domestic market with the intention of keeping Chinese factories busy at all times.