The Domestic Politics of the International Dollar Standard: A Statistical Analysis of Support for the Reserve Currency, 2000-2008

Why did most central banks continue to purchase dollar reserves during the 2000s even though they suffered mounting financial losses as a result of this policy? This paper argues that domestic political considerations determine whether policy makers accumulate or dump the reserve currency. We hypothesize that central bank independence decreases support for the dollar because independent central banks reduce the political clout of exporters and increase the salience of financial performance. This argument is tested using data on countries' holdings of US Treasury securities between 2000 and 2008. The statistical results indicate that countries with independent central banks were more likely to sell and less likely to purchase US treasuries. Our findings suggest that a complete understanding of the international dollar standard requires greater attention to domestic politics and how political institutions influence the balance of power between competing interest groups.