Should the U.S. worry if central banks around the world decide they don’t want to hold their reserves in dollars anymore? Given the amount of hand-wringing over the dollar’s status as a reserve currency, one would think that losing what is known as the “exorbitant privilege” would be a really big deal. But in a new paper, economists at the McKinsey Global Institute suggest that the U.S. might not have all that much to fret about.
“It is not clear that the United States enjoys much of a privilege at all,” the McKinsey economists write. They estimate that in a typical year, the U.S. gains the equivalent of about 0.3% to 0.5% of annual economic output — or $40 billion to $70 billion — thanks to the dollar’s dominant global role. Here’s how they break down the benefits, and the costs:
- 1) When people in other countries hold dollars, they are effectively giving the U.S. zero-interest loans — a benefit economists call “seigniorage.” Annual benefit: about $10 billion.
- 2) When foreign governments and central banks park their dollars in US Treasury bonds, they push down those bonds’ yields. That, in turn, pushes down borrowing rates for U.S. consumer and companies. Annual benefit: about 0.50 to 0.60 percentage point, or about $90 billion.
- 3) The dollar’s global allure, though, also tends to push up its exchange rate against other currencies. That makes it harder for U.S. exporters to compete abroad, and for domestic companies to compete against imports. Annual cost: $30 billion to $60 billion.
Get WSJ economic analysis delivered to your inbox: