The International Medium of Exchange

We propose a model of endogenous, persistent coordination on the international medium of exchange. An asset becomes the dominant international medium because it is widely held, and remains widely held because it is dominant. The country issuing the dominant asset is a net debtor, but earns an “exorbitant privilege” on its position. In a calibrated model, only steady states with one dominant asset are stable. The dominant country experiences a significant welfare gain, most of which is accrued during its rise to dominance. A mild trade war reduces privilege slightly, while a protracted or deep trade war eliminates it altogether.