International Currencies and Endogenous Enforcement: An Empirical Analysis
IMF Working Papers, March 1, 1997
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- International Currencies and Endogenous Enforcement: An Empirical Analysis
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Bibliographic details
- Authors: Roohi Prem
- Published: March 1, 1997
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451844764.001
Overview
- Author: Roohi Prem
- Date: March 1, 1997
- Purpose: Investigates the determinants of the international role of a currency and advocates an enforcement approach that makes explicit underlying incentive incompatibilities.
- Core argument: Standard determinants such as monetary performance and financial openness are at best imperfect indicators of a currency’s stability prospects because the issuer’s promise of stability is not exogenously enforceable.
Analytical framework
- Conceptual shift: Emphasis on endogenous enforcement mechanisms for international currencies rather than treating stability promises as exogenously enforceable.
- Additional determinants: Identifies enforcement determinants of currency internationalization beyond standard monetary-performance and financial-openness indicators.
- Incentive incompatibilities: Framework explicitly models the incentive incompatibilities between currency issuers and users that affect internationalization.
Empirical strategy
- Method: Model estimated using time-series cross-sectional analysis.
- Data: Three data sets used for estimation (three data sets described in the source).
- Comparative test: Evaluates explanatory power of standard monetary-performance-related determinants versus enforcement determinants.
Key empirical findings
- Monetary performance-related standard determinants fail to exhibit explanatory power.
- Enforcement determinants are strongly significant and robust.
- Implication: Enforcement considerations are critical in explaining currency internationalization outcomes, more so than traditional stability indicators.
Policy implications and recommendations
- Reorient analysis and policy toward enforcement mechanisms that address incentive incompatibilities between currency issuers and international users.
- Recognize limits of relying solely on monetary performance and financial openness as indicators of a currency’s international role and stability prospects.