Determining global currency bloc equilibria: An empirical strategy based on estimates of anchor currency choice

The study presents an empirical strategy for determining global currency bloc equilibria. The procedure includes, first, a nested logit estimation of the combined determinants of currency regime and anchor currency choice; second, a test for a welfare-maximizing regime decision, in which estimates of the relative welfare of alternative regimes are inferred from the results of the first step estimation; and third, taking the path dependency of regime choice into account, a currency bloc equilibrium is derived. In equilibrium, the dollar bloc is somewhat smaller and the euro bloc larger than at present. Counterfactual exercises assess among others the potential for a renminbi bloc.