BIS Working Paper: Breaking free of the triple coincidence in int. finance

This week we will discuss the 2015 BIS Working Paper 'Breaking free of the triple coincidence in international finance'.

Abstract

The traditional approach to international finance is to view capital flows as the financial counterpart to savings and investment decisions, assuming further that the GDP boundary defines both the decision-making unit and the currency area. This "triple coincidence" of GDP area, decision-making unit and currency area is an elegant simplification but misleads when financial flows are important in their own right. First, the neglect of gross flows, when only net flows are considered, can lead to misdiagnoses of financial vulnerability. Second, inattention to the effects of international currencies may lead to erroneous conclusions on exchange rate adjustment. Third, sectoral differences between corporate and official sector positions can distort welfare conclusions on the consequences of currency depreciation, as macroeconomic risks may be underestimated. This paper illustrates the pitfalls of the triple coincidence through a series of examples from the global financial system in recent years and examines alternative analytical frameworks based on balance sheets as the unit of analysis.

Robert McCauley has recently conducted follow-up work

https://www.bis.org/publ/work524.htm

Robert McCauley has recently conducted follow-up work, which we will also discuss. Find the full paper here.

The Global Domain of the Dollar: Eight Questions
Robert N. McCauley
Since the late 1950s, the rest of the world has come to use the dollar to an extent that justifes speaking of the dollar’s global domain. The rest of the world
denominates much debt in U.S. dollars, extending U.S. monetary policy’s sway. In addition, in outstanding foreign exchange deals, the rest of the world has undertaken to pay still more in U.S. dollars: of-balance-sheet dollar debts buried in footnotes. Consistent with the scale of dollar debt, most of the world economic activity takes place in countries with currencies tied to or relatively stable against the dollar, forming a dollar zone much larger than the euro zone. Even though the dollar assets of the world (minus the United States) exceed dollar liabilities, corporate sector dollar debts seem to make dollar appreciation akin to a global tightening of credit. Since the 1960s, claims that the dollar’s global role sufers from instability and confers great benefts on the U.S. economy have attracted much
support. However, evidence that demand for dollars from official reserve managers forces unsustainable U.S. current account or fscal defcits is not strong. The so-called exorbitant privilege is small or shared. In 2008 and again in 2020, the Federal Reserve demonstrated a willingness and capacity to backstop the global domain of the dollar. Politics could constrain the Fed’s ability to backstop the growing share of the domain of the dollar accounted for by countries that are not on such friendly terms with the U.S.