Analysis of the Imperial Rent of Reserve Currency

Abstract

This article provides an analysis of the economic cost incurred by the world through the use of the fiat international reserve currency since the end of the 1971 gold standard system. The article uses the Quantity Theory of Money to provide an empirical manifestation of how reserve currency yields income to its issuing country through the provision of an inflation buffer, which is equivalent to what the article frames as an imperial rent of reserve currency. The article then provides a method to estimate the cumulative quantity of this rent by using data on the broad money supply, nominal GDP, and world total official foreign exchange holdings of the currency of the country in question. The article estimates that the quantity of the imperial rent of reserve currency that accrued to the four major reserve currency-issuing states (US, Euro area, UK, Japan) from the end of the gold standard until the end of 2021, which was accumulated through the official channel only, is of a value equivalent to 11.1 trillion USD, 71 % of this amount went to the US singly.