Effect of the monetary policy in the United States on the international share of the U.S. Dollar: 1914-1945

Abstract

The United States Dollar (USD) replacement of the sterling as the dominant currency is not only the result of the "invisible hand," but also the "visible hand." This study analyzes the effect of the monetary policy in the United States (U.S.) on the international share of the USD from 1914 to 1945 using the Bayesian technique, to estimate the time-varying parameter vector autoregressive (TVP-VAR) model. The study posits two main findings. First, the time-point impulse response shows that the increase in the U.S. interest rate results in an increase in the international share of the USD, implying that this increase has an expansion effect on the USD, and the effect has no time-varying characteristics. Second, the equal time interval impulse response shows that the effect of the monetary policy on the share of the USD is greater in the short term.