Ilzetzki, Reinhart, and Rogoff (2017) – Exchange Arrangements Entering the 21st Century: Which Anchor Will Hold?
Monetary policy in the country of the “anchor” currency matters more. Non-anchor countries may wish to stabilize their exchange rates vis-a-vis the anchor country, meaning non-anchor monetary policy is determined by policy in the anchor country.
Countries may choose an anchor currency based on trade ties or on inflation concerns. They give the example of Argentina choosing the U.S. dollar over the Brazilian real despite Brazil being Argentina’s largest trading partner by far.
The variables these authors look at are
- invoicing currency
- currency of foreign reserves
- explicit currency pegs
- currency of public debts
They do not directly consider the currency of individual firms’ debts, which is important if the local central bank considers these firms’ needs in addition to the bank’s or the government’s needs. This matters more if the currency of firms’ debts and the currency of foreign reserves and government debts are not the same.