73rd International Atlantic Economic Conference

March 28 - 31, 2012 | Istanbul, Turkey

On the function of key currency

Saturday, 31 March 2012: 2:15 PM
Masayuki Otaki, Ph.D. , Institute of Social Science, University of Tokyo, Tokyo, Japan

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


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