DP16944 Exorbitant Privilege and Exorbitant Duty

Author(s): Pierre-Olivier Gourinchas, Hélène Rey
Publication Date: January 2022
Date Revised: January 2022
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Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16944

We provide a quarterly time series of the historical evolution of US external assets and liabilities at market value on the 1952-2016 period. The center country of the International Monetary System enjoys an "exorbitant privilege", a sizeable excess return of gross external assets over liabilities that significantly weakens its external constraint. In exchange for this "exorbitant privilege" we document that the US provides insurance to the rest of the world, especially in times of global stress. We call this the "exorbitant duty" of the hegemon. During the 2007-2009 global financial crisis, wealth transfers from the US to the rest of the world amounted to about 20% of US GDP and the dollar appreciated by 8% in real terms. We present a stylized model that accounts for these facts and also links the shrinking size of the hegemon in the world economy to the decline in the world real rate of interest.