Abstract
We propose a to explain the international role of the dollar and provide broad empirical support for it. Within a simple capital structure model in which firms optimally choose the currency composition of their debt, we derive conditions under which all firms issue debt in a single, dominant currency. Theoretically, it is the currency that (1) depreciates in global downturns over horizons of typical debt maturity of firms and (2) has the steepest nominal yield curve. Both forward-looking and historical measures suggest that the dollar fits this description better than all major currencies. The debt view can jointly explain the fall and the rise of the dollar in international debt markets over the last two decades. It also offers insights into the future of the dominance of the dollar in the aftermath of the Covid-19 crisis.
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