The Global Seigniorage Duopoly

Abstract

The inadequacy of global liquidity provision and the unequal distribution of its benefits stem from a fundamental distortion: the exercise of market power by the two largest issuers of international currencies. The United States and Europe jointly provide the currencies used for 79% of global reserves and 91% of trade invoicing, forming a duopoly in the means of payment used by the world economy. The exercise of this market power allows them to capture the bulk of seigniorage rents associated with the provision of global liquidity, while constraining developing countries' growth and limiting the scope of global countercyclical policies. This paper proposes aligning the issuance of special drawing rights (SDRs) with the growth of global reserve demand, as mandated by Article VIII (§7) of the International Monetary Fund's Articles of Agreement. This approach offers a politically feasible path to democratize global liquidity provision and provide developing countries with access to financing currently monopolized by advanced economies.