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The World Dollar Standard and Globalization: New Rules for the Game?

Sep 2003
Stanford King Center on Global Development Working Paper
By  Ronald McKinnon

In the absence of a purely international money, a strong central money (or key currency) becomes dominant—as the U.S. dollar now dominates on a worldwide scale outside of Europe. Today, the general use of the dollar as a vehicle currency in foreign exchange transacting, and as a dominant invoice currency in international trade, greatly facilitates international commerce. On the down side, however, it accentuates financial fragility on the periphery of the dollar standard—both in developing economies, which are dollar debtors and prone to capital flight and devaluations, and in (emerging) dollar creditors such as Japan and China, which are prone to currency appreciation and deflation. New rules for the dollar standard game are proposed for regulating capital flows so as to reduce the likelihood of foreign exchange crises in peripheral countries, to restrain mercantilist tendencies on the part of the United States, and to reduce American trade deficits with their deflationary threat to creditor countries.