Tuesday, November 19, 2013

Krugman is Right for the Wrong Reasons on Dollar Hegemony

Paul Krugman argues (see here) that supposed threats of the US dollar losing its significance as the international vehicle currency are overblown (which I certainly agree with). He reaches his conclusion, however, from a mettalist perspective, suggesting that the dollar's role reflects self-sustaining increasing returns, that is, people use dollars because the markets are thicker (many buyers and sellers) and more liquid; i.e. it is 'confidence', not power, which rules the roost. For an analysis of the mettalist perspective, along with the alternative chartalist conception of dollar hegemony, see here.

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