Sanctions strengthen the dollar? 4/30
Well, it has gotten stronger
An influential academic theory for persistently depressed real interest rates in the center is that the US supplies “safe assets” to the rest of the world. This is only part of the story. The US also produces assets that are unsafe to those who misbehave. The center country must provide safety for good behavior and punishment for bad behavior.
. . .If China also exits, or more likely starts to prepare for an exit, this will be a far more important change in the international system. Our main conclusion, however, is that the dollar will remain the central reserve currency of the remaining dollar-based system and that the role of the dollar and the demand for dollars will increase.
But a lot depends on what counts as “bad behavior.” In their earlier papers, bad behavior consists of the peripheral country expropriating foreign capital. The argument in this new paper strikes me as something of a swindle.
The dollar has gotten stronger recently, which indicates that we are still the preferred country when there is an international crisis. But I imagine that the long-term effects might be different. Freezing individuals’ assets does not reassure someone looking for a safe haven.