![]() These authors then go on to develop theoretical frameworks designed to shed light on both the roots of this dollar dominance and its implications. 6 Specifically, they point less strongly than other views to the advantages of exchange rate flexibility as an element of the international monetary system, since nominal exchange rate changes do not deliver changes in the relative prices of imports and exports, given that the prices of importables and exportables are sticky in dollar terms. These patterns have implications for economic adjustment and policy, as summarised in Gopinath. The dollar is, furthermore, a key determinant of aggregate trade volumes for the world net of the United States, since it has a sharp impact in other countries on the relative price of traded and nontraded goods, and hence on mark-ups on tradeables and the incentive to export. They show that the strength of the dollar is a key predictor of global inflation, since changes in the dollar exchange rate are translated one-for-one into changes in the prices of imports in other countries. In contrast, this is not (or not to the same extent) the case for monetary-policy-induced fluctuations in other exchange rates since import prices are sticky in dollar terms. Additionally, they show that U.S.-monetary-policy-induced dollar fluctuations are passed through into other countries’ import prices. 5 In particular, they provide evidence that the dollar exchange rate is more important than the effective exchange rate in price pass-through and trade elasticity regressions. document and draw out the implications of these observations. 4 Roots and implications of the dollar dominance and sticky prices Its point of departure is the observation that some 60% of identified global foreign exchange reserves take the form of dollars, that more than 60% of the foreign currency liabilities and assets of banks are in dollars, and that the share of world trade invoiced in dollars far exceeds the United States’ share in global imports and exports. The Harvard view is fundamentally empirical, although the regularities on which it focuses have stimulated some interesting theorising. The Harvard view: The international monetary system remains unipolar and dollar-based 3 Still, I will maintain this as a useful working distinction, or pretense, for the purpose of this discussion. Nor are the two views rigidly and consistently associated with Harvard and Berkeley. It can be argued that the two views overlap and that one view is more about the past while the other is more about the future. Truth be told, the distinction is not always clear cut. 1 The alternative, which I will call the ‘Berkeley view’, is that the system is evolving away from the United States and the dollar, toward a multipolar world in which several consequential international and reserve currencies will coexist, other countries will no longer rely exclusively or even mainly on the US for international liquidity and governance will be a collective endeavor. One, which I will call the ‘Harvard view’, is that there is a striking degree of persistence in the structure of the system, which remains dollar-based and U.S. How has the international monetary system evolved over the last 75 years and how will it evolve in the future? I organise my answer to this question by distinguishing two views.
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