Might the dollar eventually follow the precedent of the pound and cede its status as leading international reserve currency?

• Position: Conferences

Might the dollar eventually follow the precedent of the pound and cede its status as leading international reserve currency? To answer the question, Chinn and Frankel econometrically estimate determinants of the shares of major currencies in the reserve holdings of the world's central banks. Significant factors include: size of the home country, inflation rate (or lagged depreciation trend), exchange rate variability, and size of the relevant home financial center (as measured by the turnover in its foreign exchange market). The authors do not find that net international debt position is an important determinant. They do find that the relationship between currency shares and their determinants is nonlinear, but changes are felt only with a long lag. The advent of the euro interrupts the continuity of the historical dataset. So, Chinn and Frankel estimate parameters on pre-1999 data and then use that data to forecast the EMU era. Their equation correctly...