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Payments-related intraday credit differentials and the emergence of a vehicle currency

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  • Sujit Chakravorti

Abstract

The U.S. dollar serves as a vehicle currency or medium of exchange in the global foreign exchange markets. After reviewing some of the existing theories on vehicle currencies, the hypothesis put forth is that the dollar's role is linked to the relatively low cost of payments-related intraday credit available to payment system participants. Differences in the types of measures used by payment system operators to reduce settlement and systemic risk in the payment system give rise to liquidity differentials between currencies. ; After reviewing the types of intraday credit facilities extended to participants on payment systems settling the major currencies, a foreign exchange market is simulated. Results from the simulation indicate that if there are sufficient differences in the availability of intraday credit between one settlement system and the others, a vehicle currency emerges. Furthermore, vehicle currency trades have narrower bid-ask spreads than other foreign exchange transactions.

Suggested Citation

  • Sujit Chakravorti, 1997. "Payments-related intraday credit differentials and the emergence of a vehicle currency," Financial Industry Studies Working Paper 97-3, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddfi:97-3
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    References listed on IDEAS

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    Cited by:

    1. Chakravorti, Sujit, 2000. "Analysis of systemic risk in multilateral net settlement systems," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(1), pages 9-30, January.

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    More about this item

    Keywords

    Credit;

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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