SMU SOE Seminar Series (November 12, 2026): Trade Networks and a Dominant Settlement Currency

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ABSTRACT

We develop a network model of currency competition in which issuers choose commitment levels to improve the international usability of their currencies, while users allocate trade settlement across currencies depending on their positions in a trade network. Our model identifies a feedback mechanism between users’ currency choices and issuers’ commitments, showing that network integration reinforces incumbent currencies, while central users concentrate currency use more strongly and increase the issuer’s incentive to support the currency they prefer. Using import-invoicing data for USD, EUR, and RMB, we provide evidence consistent with the incumbent-reinforcement mechanism: growth in network centrality reinforces USD and EUR invoicing where these currencies are already entrenched, but not RMB invoicing.

Keywords: Global Currency; Trade Network; Subgame Perfect Equilibrium; Network Game.

JEL: C72; D85; E42; F33.

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