The Euro’s Challenge to the Dollar: Different Views from Economists and Evidence from COFER (Currency Composition of Foreign Exchange Reserves) and Other Data
IMF Working Papers, June 1, 2006
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Bibliographic details
- Authors: Ewe-Ghee Lim
- Published: June 1, 2006
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451864137.001
Core thesis and opposing views
- One view: Europe's large economy and diversification effects undergird a vigorous challenge by the euro to the dollar as an international currency.
- Alternative view: "Network externalities" underpin continued dollar dominance and make it difficult for challengers to displace the U.S. dollar as the primary vehicle currency.
- Empirical assessment in the paper: the data to date support the network-externalities view, while also showing significant progress by the euro relative to legacy currencies.
Key empirical findings
- The data show the euro has significantly overtaken the legacy currencies as a reserve currency.
- Large economic size alone is generally insufficient to overcome the network externalities that support established vehicle currencies.
- There remains scope for the euro to advance as an international store of value.
- The paper discusses the euro's medium-term prospects (analysis and discussion of potential paths forward).
Methodology and evidence base
- Uses COFER (Currency Composition of Foreign Exchange Reserves) and other data to assess reserve currency composition and trends.
- Contrasts theoretical perspectives (size/diversification vs. network externalities) with observed reserve data.
Policy-relevant implications and discussion points
- Policymakers should recognize that economic size is not by itself decisive in changing international currency hierarchies because of network externalities.
- The euro’s progress in reserve holdings suggests policy and market developments can create scope for greater international use as a store of value.
- Medium-term prospects depend on factors beyond size, including market practices, liquidity, and continued adoption in official and private portfolios.
Authorial and institutional note
- Disclaimer in the paper: "This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate."
IMF Working Papers — The Euro’s Challenge to the Dollar: Different Views from Economists and Evidence from COFER (Currency Composition of Foreign Exchange Reserves) and Other Data — Ewe-Ghee Lim — June 1, 2006.