Dollar Erosion: Understanding the Loss of Reserve Currency Status

We quantify the impact of the loss of reserve currency status in goods and asset markets.In goods markets, the loss of seigniorage (1% of GDP per annum) makes American households spend less, mostly on U.S. goods, leaving an excess supply of U.S. goods to be cleared by a real depreciation of the dollar.The larger the home bias and the lower the elasticity of substitution between home and foreign goods, the larger the required depreciation.Standard parameters imply an 8.8% real depreciation of the dollar.In asset markets, about 50% of GDP in dollar bonds must be reabsorbed by home investors, raising the U.S. real interest rate.Standard parameters imply a 90 basis points rise, leading to an aggregate wealth loss of roughly one year of U.S. GDP.