Events

Professor Arvind Krishnamurthy
The John S. Osterweis Professor of Finance
Stanford Graduate School of Business
Stanford University

Over four centuries, specific currencies have dominated global debt denomination. We present a liquidity-based theory that explains the centrality of the Dutch florin, British pound, and US dollar, and that rationalizes features of the international monetary system. Firms issue debt that is extinguishable by financial assets in the same denomination. Asset markets endogenously differ in liquidity, and firms optimally choose to denominate debt in the most liquid asset’s unit. Issuing in the more liquid denomination raises its benefits, generating dominant currency equilibria. Governments initiate and reinforce this process by fostering large pools of liquid assets and investing in market liquidity.