Explaining the Dominant Currency Paradigm
The dominant currency paradigm is about the fact that the US dollar matters a huge amount in setting the prices at which trade takes place in the global economy.
Nominal exchange rates have always been at the center of fierce economic and political debates on spillovers, currency wars, and competitiveness. It is easy to understand why: in the presence of price rigidities, nominal exchange rate fluctuations are associated with fluctuations in relative prices and therefore have consequences for real variables such as the trade balance, consumption, and output
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