Report on "Dollar Hegemony and the Global Spillover of US-Originated Shocks"
While dollar stablecoins may strengthen the dollar's hegemony, there is also a diagnosis from the Bank of Korea that they could actually undermine the dollar's international status as a safe-haven currency.
On September 15, the Bank of Korea released a report titled "BOK Economic Research: The Global Spillover Effects of Dollar Hegemony and US-Originated Shocks." The report was authored by Son Minkyu, head of the Financial Modeling Team at the Economic Modeling Division of the Bank of Korea.
The report analyzed the domestic spillover effects by incorporating a dollar channel into a traditional Dynamic Stochastic General Equilibrium (DSGE) model. In addition, it examined the potential global proliferation of dollar stablecoins and the resulting changes in the dollar's international status, as well as the impact these changes could have on the domestic economy.
The report diagnosed that if dollar stablecoins are widely used for export and import settlements due to their transaction convenience, the impact of dollar value fluctuations on global trade could be amplified. It pointed out that the spread of dollar stablecoins could strengthen dollar hegemony by increasing overseas demand for US Treasury bonds as collateral assets.
However, the report also warned that if excessive issuance of US Treasury bonds is tolerated and the credibility of US Treasuries declines, or if the risk of coin runs increases due to insufficient regulation-resulting in greater price volatility of US Treasuries, which serve as collateral assets for issuing companies-there is a possibility that the dollar's status as a safe-haven currency could be negatively affected.
Meanwhile, the report also stated that the dollar, functioning as a global safe asset and international trade settlement currency, amplifies US-originated financial shocks in the domestic economy. The analysis found that, in the absence of the dollar's international financial channel, the impact of US financial risk shocks would reduce the decline in domestic production by two-thirds.
If Korean exports were settled in won instead of dollars, the decline in domestic production would be reduced by about one-quarter, and the negative impact of US interest rate hikes on domestic production would be reduced by approximately 30%.
Son emphasized, "The international currency function of the dollar is a structural reason that amplifies US-originated shocks in Korea," adding, "It is necessary to weaken the transmission channels of these shocks by expanding won-based settlements and diversifying foreign currency borrowing structures."
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