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Currency hierarchy and policy space
The currency hierarchy imposes major constraints to policy space in developing and emerging countries. Barbara Fritz outlines the problem and research agenda for development economics. You can find the respective paper by de Paula et al. here.
In the global currency hierarchy, the most powerful currencies are on top. These are according to definition 3-5 currencies, such as the US Dollar, the euro, the Japanese Yen and the British Pound. These currencies dominate the international foreign exchange (ForEx) market. Beyond fulfilling domestic functions of money, they also fulfil these functions in an international realm. These (domestic and international) functions of money (see Keynes 1930 and 1944) are
- Money as a (domestic and international) standard e.g. of credit contracts or the pricing of goods and services.
- Money as a (domestic and international) means of payment e.g. for settling credit contracts or goods and services.
- Money as a (domestic and international) store of value for e.g. hoarding, transaction or speculative purposes.
The 3-5 most powerful currencies take over these functions not only for their own nation and in an international realm, but also partly domestically in other nations, where the national currency is weak. On the second level in between are currencies that take over all domestic functions (only around 25 currencies). On the bottom of the hierarchy of currencies are roughly 130 currencies that are too weak and only partly fulfil the domestic function.
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