On the Function of Key Currency
Masayuki Otaki
Institute of Social Science, University of Tokyo
7-3-1 Hongo Bukyo, Tokyo 113-0033, Japan.
E-mail: ohtaki@iss.u-tokyo.ac.jp
Phone: +81-3-5841-4952 Fax: +81-3-5841-4905
Abstract
Some studies (e.g., Matsuyama, Kiyotaki, and Matsui (1993)) assert that
the selection of a currency as a key currency is a kind of hysteresis dominated
by contingencies. However, historical evidence suggests that this selection
depends on some plausible and inevitable economic factors.
This study examines the following factors: overwhelming industrial power
and possession of huge amounts of foreign assets and gold. On the basis
of these ample economic potentials, the key-currency country enjoys her
seigniorage in return for the bearing the sovereign risk of the surrounding
countries that accept her currency. Thus, the key-currency system can be
regarded as an international insurance system that relies on the economic
power of the key-currency country.
Key Words: Key-Currency as an Insurance System, Seigniorage,
Sovereign Risk
JEL Classifications: E12, E42, F33