Top Highlights

• A common answer is that the dominant role of the U.S. dollar in international trade and finance—about 60 percent of international reserves are held in dollar-denominated assets, for example—makes Fed actions particularly consequential.
• Why is the dollar the most often-used global currency? Does the dollar’s international role unfairly advantage the United States, to the detriment of other countries? Does the dollar’s role magnify the effects of Fed actions on other countries, and if so, how?
• Stability of value. Since the mid-1980s, the Fed has done a good job keeping inflation low and stable. Liquidity. U.S. financial markets, especially the U.S. Treasury market, are the deepest and most liquid in the world. In part this is the result of network externalities (people like to trade in the Treasury market because other people trade in it...
• In particular, the interest rates that the U.S. pays on safe assets, such as government debt, are generally no lower (and are currently higher) than those paid by other creditworthy industrial countries.
• A great deal of U.S. currency is held abroad, which amounts to an interest-free loan to the United States. However, the interest savings are probably on the order of $20 billion a year, a small fraction of a percent of U.S. GDP, and that “seigniorage,” as it is called, would probably still exist even if the dollar lost ground to other currencies in...

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