DP12973 International Currencies and Capital Allocation

Author(s): Matteo Maggiori, Brent Neiman, Jesse Schreger
Publication Date: June 2018
Date Revised: May 2019
Keyword(s): Capital Flows, Exorbitant Privilege, Home Bias, reserve currencies
JEL(s): E42, E44, F3, F55, G11, G15, G23, G28
Programme Areas: Financial Economics, International Trade and Regional Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=12973

We establish currency as an important factor shaping global portfolios. Using a new security-level dataset, we demonstrate that investor holdings are biased toward their own currencies to such an extent that countries typically hold most of the foreign debt securities denominated in their currency. While large firms issue in foreign currency and borrow from foreigners, most firms issue only in local currency and do not directly access foreign capital. These patterns hold broadly across countries except for the United States, as foreign investors hold significant shares of US dollar bonds. The share of dollar-denominated cross-border holdings surged after 2008.