What Determines Utility of International Currencies?

Author Name OGAWA Eiji (Faculty Fellow, RIETI) / MUTO Makoto (Hitotsubashi University)
Creation Date/NO. November 2018 18-E-077
Research Project Exchange Rates and International Currency
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Ogawa and Muto (2017a, 2017b) estimated time series of coefficients on five international currencies (the US dollar, the euro, the Japanese yen, the British pound, and the Swiss franc) in a utility function. We call the coefficients as utility of an international currency. The time series show that utility of the US dollar as an international currency has kept at the first position in the changing international monetary system where the euro created as a single common currency in European countries. On one hand, utility of the Japanese yen has been declining as an international currency. In this paper, we investigate what determines utility of the international currencies. We use a dynamic panel data model to analyze the issue with GMM. Specifically, liquidity shortage in terms of an international currency means that it is inconvenient for economic agents to use the relevant currency for international economic transactions. In other words, the liquidity shortage might reduce utility of an international currency. In this analysis we focus on liquidity premium which represents liquidity shortage in terms of an international currency. Our empirical results showed not only inertia in terms of change but also an impact of the liquidity shortage in an international currency on utility of the relevant international currency.