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1. Dollar Colonisation: The Destructive Policy Implications of Modern Monetary Theory

Author:
Photis Lysandrou
Publication Date:
01-2025
Content Type:
Working Paper
Institution:
City Political Economy Research Centre (CITYPERC), University of London
Abstract:
Modern monetary theory argues that all governments that issue their own currency have the same policy space. The present paper argues that this position is wrong. For it to be valid, abstraction must be made from the gravitational force of the US dollar that stems from its backing mass of securities and is transmitted through international investment flows. On recognition of this gravitational force, it becomes clear that the huge size disparity separating the US financial market from those of other markets, and most notably those of the EMEs, translates into an equally huge disparity regarding policy space. The policy implications for EME governments are that they should, where possible, join their financial markets into regional blocs of sufficient sizes as can give their regional currencies enough backing mass to allow them to resist the gravitational pull of the dollar. Only by pooling their currency sovereignty can EME governments retain some scope for pursuing policies independently of those pursued by the US government. On the contrary, any such scope is destroyed if EME governments in countries with small financial markets follow the MMT's advice to retain their local currencies because that advice condemns these currencies to entrapment in the dollar's gravitational field and even possibly to outright dollar colonisation.
Topic:
Currency, Dollar, Colonization, and Modern Monetary Theory
Political Geography:
Global Focus

2. Significant, but Not Systemic: The Challenge of China’s Efforts to Rival Western Financial Predominance

Author:
Martin Chorzempa and Lukas Spielberger
Publication Date:
05-2025
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
Despite worldwide concerns about the US dollar, the Chinese renminbi is not yet ready to be a serious contender for leading international currency status. This Policy Brief examines three of the most important Chinese approaches to increasing the renminbi’s role as an international settlement currency: promote bilateral swap agreements between the People's Bank of China and other central banks; create international payment systems that do not involve the dollar, most notably the Cross-Border Interbank Payment System; and develop a central bank digital currency for alternative payment infrastructures. The authors find that Beijing’s efforts fall short of posing a systemic challenge to the dollar or to infrastructures like SWIFT. Nevertheless, these approaches have enabled China to use its currency for bilateral foreign policy. US and European policymakers should consider countering or attenuating these efforts, even though they have had limited success in increasing renminbi usage.
Topic:
Foreign Policy, Central Bank, Currency, Digital Currency, and SWIFT
Political Geography:
China and Asia

3. The Future of the Belt and Road in Europe: How China’s Connectivity Project is Being Reconfigured across the Old Continent – and What It Means for the Euro-Atlantic Alliance

Author:
Nicola Casarini
Publication Date:
02-2024
Content Type:
Working Paper
Institution:
Istituto Affari Internazionali
Abstract:
China’s Belt and Road Initiative (BRI) has entered the twilight zone in the old continent, following a deterioration of bilateral relations between the EU member states and China over the last years. Italy’s official exit from the BRI at the end of 2023 was a further blow to Chinese President Xi Jinping’s signature foreign policy. Yet, the BRI in Europe is being reconfigured rather than being terminated. In Western Europe, the BRI is moving away from physical infrastructure projects and investment in industrial assets – the latter being increasingly protected from Chinese takeovers by both national and EU legislation – to financial and monetary connectivity. This shift is welcomed by various European actors, including some policymakers at the national level, eurozone institutions and major banks. Concurrently, most of Eastern European countries continue to promote BRI projects and seek to attract Chinese investments, suggesting that there is a two-speed Europe when it comes to China, both in terms of geography and sectors.
Topic:
Infrastructure, Foreign Direct Investment, European Union, Belt and Road Initiative (BRI), and Currency
Political Geography:
China, Europe, Asia, and Italy

4. Triffin Reloaded: The Matrix of Contradictions around Global Quasi-State Money

Author:
Herman Mark Schwartz
Publication Date:
03-2024
Content Type:
Working Paper
Institution:
Max Planck Institute for the Study of Societies
Abstract:
What explains the US dollar’s role in the global economy and the tensions affecting its likely persistence? Most analyses start from Triffin’s dilemma, which accurately captured specific but partial tensions of a global monetary system based on essentially fixed exchange rates, gold backing for its core currency, and relatively robust capital controls. Triffin’s approach, and those based on it, struggles to explain the tensions in a system with floating exchange rates and fiat money, because Triffin and successors assume a commodity theory of money, a loanable funds model for credit creation, and the “triple coincidence” of monetary, legal, and economic zones. Approaching the question from different premises – chartalist money, endogenous credit creation, and interlocked global balance sheets – enables us to see four factors behind the antinomies or dilemmas that structure the dynamics and durability of US dollar centrality. Those four factors are adequate credit creation and thus global aggregate demand growth, current account deficits for the core, domestic legitimacy in major economies, and the dollar’s status as global quasi-state money.
Topic:
Debt, Money, Currency, Power, Financial Systems, Geoeconomics, and Reserves
Political Geography:
Global Focus and United States of America

5. Asset Price Changes, External Wealth and Global Welfare

Author:
Timothy Meyer
Publication Date:
02-2024
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
U.S. equity outperformance and sustained dollar appreciation have led to large valuation gains for the rest of the world on the U.S. external position. The author constructs their global distribution, carefully accounting for the role of tax havens. Valuation gains are concentrated and large in developed countries, while developing countries have been mostly bypassed. To assess the welfare implications of these capital gains, the author adopts a sufficient statistics approach. In contrast to the large wealth changes, most countries so far did not benefit much in welfare terms. This is because they did not rebalance their portfolios and realize their gains, while they were further hurt by rising import prices from the strong dollar.
Topic:
Globalization, Financial Markets, Currency, Valuation, and Foreign Assets
Political Geography:
North America and United States of America

6. Paying Off Populism: How Regional Policies Affect Voting Behavior

Author:
Robert Gold and Jakob Lehr
Publication Date:
03-2024
Content Type:
Working Paper
Institution:
Kiel Institute for the World Economy (IfW)
Abstract:
This paper shows that regional policies can decrease populist support. We focus on the “development objective” (Objective-1) of the European Regional Development Fund (ERDF), meant to support lagging-behind regions. For causal inference, we exploit three sources of quasi-exogenous variation in a Regression-Discontinuity-Design (RDD), a Difference-in- Differences framework (DiD), and with matching techniques. Using NUTS3-level panel data on the outcomes of elections to the EU parliament, observed over the period 1999-2019, we consistently find that Objective-1 transfers reduces the vote share of right-fringe parties by about 2.5 pp. Left-fringe party support is not affected. Complementary analyses of individual-level survey data from the Eurobarometer show that the European Regional Policy increases trust in democratic institutions and decreases discontent with the EU.
Topic:
Political Economy, European Union, Populism, Regional Integration, Currency, and Regional Politics
Political Geography:
Europe

7. Reconciling Contrasting Views on the Growth Effect of Currency undervaluations

Author:
Cécile Couharde, Carl Grekou, Valérie Mignon, and Florian Morvillier
Publication Date:
05-2024
Content Type:
Working Paper
Institution:
Centre d'Etudes Prospectives et d'Informations Internationales (CEPII)
Abstract:
This paper provides an in-depth analysis of the link between exchange rate misalignments and economic growth for a large sample of 170 countries over the 1973-2019 period. We rely on new cross-country data on multilateral currency misalignments and cross-quantile regressions to demonstrate that the seemingly divergent views of the Washington Consensus and the export-led growth theory on the role of currency undervaluations in promoting economic growth can be reconciled. Although any significant departures from the equilibrium exchange rate levels are found undesirable, we show that undervaluations are more likely to stimulate economic growth in developing countries. However, this positive impact is observed only up to certain thresholds of development level and currency undervaluation. Consequently, strategies in the poorest countries that systematically undervalue currencies in real terms to foster growth should be carefully tailored, as they raise the risk for these economies of switching from a positive to a less favorable growth regime, depending on both their specific wealth level and the extent of their currency undervaluation.
Topic:
Economic Growth, Currency, and Undervaluation
Political Geography:
Global Focus

8. External Debt Stress and Domestic Debt Restructuring: Resolving a Paradox

Author:
C. P. Chandrasekhar
Publication Date:
07-2024
Content Type:
Working Paper
Institution:
Political Economy Research Institute (PERI), University of Massachusetts Amherst
Abstract:
The ongoing sovereign debt crisis in low- and middle-income countries (LMICs) was signalled by instances of default or failure to meet external debt obligations denominated in hard currencies. But the response to the crisis has included attempts to restructure domestic sovereign debt issued largely in domestic currencies. Such moves have been justified by identifying the crisis as one of excessive aggregate public debt rather than just unsustainable levels of external debt. There is a need, it is argued, to reduce the gross financing needs (foreign and domestic) of debt-stressed governments that have accumulated excessively high levels of aggregate—domestic and foreign currency—public debt. This assertion ignores the difference between the stress associated with servicing debt in domestic and foreign currency. Governments can mobilise domestic resources using their sovereign right to tax and central banks have control over domestic currency supply, whereas both have little control over foreign currency availability, which depends on net foreign revenues earned and on net inflows of foreign incomes, transfers and capital. While domestic debt restructuring releases domestic resources, it does not automatically yield the foreign currency needed to relieve external debt stress. In addition, since the holders of domestic sovereign debt include citizens deploying their savings to invest in pension funds, insurance products and mutual funds, and commercial banks parking resources in ‘safe investments’, restructuring that debt through explicit or implicit haircuts is bound to be economically destabilising. Past savings would be eroded with adverse impact on current demand, and the damage to the balance sheets of banks would restrain credit to the detriment of consumption and investment. This makes implementation of domestic debt restructuring costly and difficult, as experience illustrates. Given that context, the paper examines the possible reasons why when less developed countries face external debt stress, the IMF and global finance insist on domestic debt restructuring as part of conditions associated with provision of emergency balance of payments finance or the restructuring of foreign debt.
Topic:
Debt, Investment, Currency, and Debt Restructuring
Political Geography:
Global Focus

9. Alternatives to the U.S. Dollar as a Global Currency Face Brick Walls

Author:
Piotr Dzierżanowski
Publication Date:
04-2024
Content Type:
Working Paper
Institution:
The Polish Institute of International Affairs
Abstract:
In the wake of a series of economic and political crises, including developing countries’ external debt crisis and Russian aggression against Ukraine and related sanctions, there has been speculation about the possible replacement of the U.S. dollar (USD) in the global economy. This could take place through the emergence of a new global currency or a shift to settlements in the currencies of the transacting parties. Either of these solutions involves political and economic difficulties and is not currently realistic. It is advisable that Poland, in its foreign policy, assumes the continuation of the dominance of USD in the global economy.
Topic:
Debt, Economy, Currency, and Dollar
Political Geography:
Poland and Global Focus

10. Egypt’s 2023–24 Economic Crisis: Will This Time Be Different?

Author:
Ruchir Agarwal and Adnan Mazarei
Publication Date:
08-2024
Content Type:
Policy Brief
Institution:
Peterson Institute for International Economics (PIIE)
Abstract:
Egypt narrowly averted a full-blown economic crisis in early 2024 when the International Monetary Fund (IMF) and others gave Egypt a financial lifeline to curb its losses of foreign exchange reserves. This Policy Brief traces the origins and developments of the current crisis, and the country's history of repeated balance of payments crises. The 2023-24 crisis is one of eight such events in Egypt since 1952, driven by governance and policy deficiencies. The COVID-19 pandemic and the war in Ukraine have exacerbated Egypt's problems. Egypt's strategic importance in the Middle East, underscored by the Gaza conflict, has ensured continued international financial support, allowing Egypt to bet on its "too strategic to fail" position and avoid reforms. Entrenched military dominance and cronyism have obstructed necessary economic reforms. The authors conclude that Egypt needs to address these challenges and undertake major reforms to break free from its recurring cycle of crises and stop relying on international bailouts.
Topic:
Foreign Exchange, Currency, COVID-19, and Economic Crisis
Political Geography:
North Africa and Egypt