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From Currency to Capabilities

From Currency to Capabilities

(p.13) One From Currency to Capabilities
Currency Statecraft
Benjamin J. Cohen
University of Chicago Press

This chapter provides a brief introduction to the nature of currency internationalization and its implications for state power. Currencies may play a variety of roles both within markets and between governments. The driving force behind currency internationalization is competition. Five types of power resource are particularly influential in determining the competitiveness of a currency: economic size, financial development, foreign-policy ties, military reach, and effective governance. Differing degrees of competitiveness create a hierarchy among moneys a Currency Pyramid that is narrow at the top, where one or a few moneys dominate, and increasingly broad below, reflecting descending levels of competitiveness. Hierarchy, in turn, suggests varying degrees of reciprocal influence. Currency capabilities are derived from broader patterns of monetary power among states, which are a reflection of each country’s ability to delay or deflect the costs of adjustment to external equilibrium. An international currency adds to a country’s power to delay by augmenting the nation’s overall liquidity position. Since international moneys typically play different combinations of roles, potential degrees of currency power may vary considerably as well.

Keywords:   currency internationalization, currency competition, currency pyramid, monetary power, currency power, adjustment costs

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