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A Keynesian Theory of Hegemonic Currencies

By Thomas I. Palley

Several years ago (June 2006) I wrote an article advancing a new theory of why the dollar is the world’s dominant currency and why it is likely to remain so. The article was published in the midst of the last boom and sank like a stone. But now debate about the cause of the dollar’s hegemony has been revived in an interesting paper by Fields and Vernengo titled “Hegemonic currencies during the crisis: The dollar versus the euro in a Cartelist perspective” (also here). Their paper provides an opportunity to revive discussion, so I am posting the article again. Here it is (subject to a couple of word edits):

The U.S. dollar is much in the news these days and there is a sense that the world economy may have become excessively reliant on the dollar. This reliance smacks of dysfunctional co-dependence whereby the U.S. and the rest of the world both rely on the dollar’s strength, but neither is well served by it.

Read the rest here.


  1. a professor of economics at the universidad de los andes in colombia just published a paper along the same lines as professor palley.

    It's title is 'Mercantilismo, acumulación de capital y desarrollo económico en la economía monetaria de producción (nacional)' and uses a keynesian monetarist framework to argue that the establishment of a global currency is an indispensable stepin development.
    the paper can be found here:

  2. Not sure what a Keynesian-Monetarist approach might be, but what Tom argues is that countries in general need more Keynesian policies, which would allow them to rely less on exports to US markets and more on their own domestic markets.

    1. In the paper the author explains what he means by the term. It basically is an approach developed at the Free University of Berlin. It builds on Keynes monteary theories and in particular his so called 'Monetay Theory of Production'

  3. I like this theory.

    One quibble: I would say it's a "Monetarist theory" (though I won't really push that, because it's probably not worth arguing about).

    A second quibble: you really need the concept of the US Fed being "Loan placement officer of last resort" for the world.

    My old post, where I argue something very similar:

  4. Thanks for the link Nick. I doubt that Palley would agree with calling it Monetarist, but I'll let him now.

  5. Matias: Yep. My tongue was slightly in cheek when I said that. Sometimes it's hard to tell the difference between: Keynesians who take monetary exchange seriously (all true Scotsme I mean Keynesians should); and Monetarists (like me) who take disequilibrium seriously.


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