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Currency Transactions and International Settlements - Essay Example

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This paper 'Currency Transactions and International Settlements" focuses on the fact that an incumbent international currency holds a built-in advantage in retaining its status, and in so doing, it pays for central banks to hold its foreign exchange. …
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Currency Transactions and International Settlements
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Download file to see previous pages Even during the abundance of the late-19th century pound sterling standard, the currency’s nomination had not yet been completed (ibid). Other factors such as another country's arrival account for a significantly larger share of international financial and commercial transactions can manage to offset the advantages of incumbency. Likewise, the network externalities that have long worked in favour of a dominant currency suddenly started working against it, alongside with the initial scenario of a new dominant currency in an onset (Eichengreen 1997). Creating a stable market sufficient enough to be attractive to international investors, including central banks requires periodic liquidity management and lender-of-last-resort operations. This implies that the domestic central bank will, in turn, have regulatory and supervisory authority over the market in whose management is engaged (ibid).
Federal Reserve willing and able enough to carry out international transactions. In contrast, the Maastricht Treaty faced a strong division between responsibility for monetary policy and responsibility for regulation and supervision, whose responsibility will rest on national authorities (Triffin 1964).

The practice of holding foreign currencies by bankers and governments is traced back over centuries, but it was only in the 19th century that holding foreign assets as a reserve against official liabilities became a standard practice (Nurkse 1944). It so happened when liquid financial markets, modern central banks, and the international gold standard emerged. It may be inferred that the rise of these practices was correlative of modern economic growth which began thriving in the 19th century (ibid). Commodity money already dominated domestic and international transactions even prior to the industrial revolution. It was considered impractical to use token coins and paper money if there were inadequate standardization that would make counterfeiting easy (Redish 1990).   ...Download file to see next pagesRead More
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