Published: 2022-10-16

Triffin Dilemma

The issuer of a reserve currency must continue running a balance-of-payments (current account) deficit to sustain the international liquidity of the reserve currency. This inevitably lowers confidence in the value of the reserve currency. On the other hand, if the reserve currency country reduces international liquidity to maintain confidence, it negatively affects international trade and capital flows, which also inevitably lowers confidence in that reserve currency. The Triffin dilemma refers to the situation in which a reserve currency country falls into this dilemma. In the 1960s, as the United States ran current account deficits for years, questions were raised about how long this condition could persist and, if the U.S. turned to a current account surplus, who would supply international liquidity. Robert Triffin, then a professor at Yale University, testified before the U.S. Congress: “If the United States does not allow current account deficits and stops supplying international liquidity, the world economy will shrink significantly,” and “however, if the deficit persists and the U.S. dollar is oversupplied, the dollar’s value will decline, its credibility as a reserve asset will deteriorate, and the fixed exchange rate system will collapse.”

Topics: Key currency,exchange rate,United States,Dollar
Category: Wiki/Economy

Published: 2022-10-16

Triffin Dilemma

The issuer of a reserve currency must continue running a balance-of-payments (current account) deficit to sustain the international liquidity of the reserve currency. This inevitably lowers confidence in the value of the reserve currency. On the other hand, if the reserve currency country reduces international liquidity to maintain confidence, it negatively affects international trade and capital flows, which also inevitably lowers confidence in that reserve currency. The Triffin dilemma refers to the situation in which a reserve currency country falls into this dilemma. In the 1960s, as the United States ran current account deficits for years, questions were raised about how long this condition could persist and, if the U.S. turned to a current account surplus, who would supply international liquidity. Robert Triffin, then a professor at Yale University, testified before the U.S. Congress: “If the United States does not allow current account deficits and stops supplying international liquidity, the world economy will shrink significantly,” and “however, if the deficit persists and the U.S. dollar is oversupplied, the dollar’s value will decline, its credibility as a reserve asset will deteriorate, and the fixed exchange rate system will collapse.”

Topics: Key currency,exchange rate,United States,Dollar
Category: Wiki/Economy