The role of currencies in external balance sheets

Abstract

This paper constructs a dataset on the currency composition of external balance sheets for 50 countries from 1990 to 2020. Our findings reveal the persistent dominance of the US dollar and euro in global external positions, while many emerging markets have shifted from short to long foreign-currency exposures. This transformation, marking a departure from the “original sin” phenomenon, reflects reduced foreign-currency debt liabilities and increased foreign-currency assets. We introduce financial exchange rate indices to measure valuation effects, documenting that substantial wealth transfers across countries mitigated global imbalances during the 2008 financial crisis, yet exacerbated them during the COVID-19 shock.