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Dollar liquidity, financial vulnerability and monetary sovereignty

Dollar liquidity, financial vulnerability and monetary sovereignty

Calvert Jump, Robert ORCID: 0000-0002-2967-512X and Michell, Jo (2023) Dollar liquidity, financial vulnerability and monetary sovereignty. Development and Change, 54 (5). pp. 1087-1113. ISSN 0012-155X (Print), 1467-7660 (Online) (doi:

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Periods of dollar-led global monetary tightening generate negative effects in many lower and middle-income countries. The tightening cycle which commenced in early 2022 has exacerbated the financial dislocation experienced by countries including Zambia, Sri Lanka and Pakistan. How can policy makers protect their economies from such external shocks and foster a stable developmental environment? Some recent contributions argue that the capacity of countries to insulate domestic policy from global financial conditions depends upon 'monetary sovereignty'. We argue that this misrepresents the constraints to macroeconomic policy and development strategy. Monetary sovereignty, if narrowly defined, is necessary but not sufficient for domestic policy autonomy. Stronger definitions impose unrealistic requirements on debt denomination and exchange rate regimes. We argue that, outside of currency unions, the main policy constraints for developing countries are limited domestic productive capacity and integration into global trade and financial networks rather than monetary arrangements. We illustrate our discussion with an empirical examination of three recent episodes of global illiquidity and/or policy tightening: the 2013 taper tantrum, the March 2020 liquidity shock, and the 2022 dollar tightening cycle. We find evidence that monetary sovereignty does not insulate a country from episodes of dollar illiquidity. While 'fundamentals' such as current account deficits and foreign exchange reserves provide limited power in identifying vulnerability, measures of financial depth and activity do appear related to vulnerability.

Item Type: Article
Uncontrolled Keywords: development; monetary sovereignty; MMT; capital flows; capital markets
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
H Social Sciences > HG Finance
Faculty / School / Research Centre / Research Group: Faculty of Business
Last Modified: 21 Dec 2023 11:46

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