Eurodollars: a paper pyramid?

Abstract

In this day and age the “magic art” of credit creation is performed on an international scale, fostering a great amount of liquidity held by banks, enterprises and individuals all residing outside the U.S., which forms what is known as the Eurodollar market. There is unanimous agreement that this transmits and amplifies inflationary pressures operating inside the U.S. It has also been argued that the Eurodollar can hinder domestic monetary policies outside the U.S. Furthermore, it is claimed that the Eurodollar market is used to finance speculative attacks agains national currencies and contributes to the ever widening the dollar as the currency of intervention on foreign exchange markets. The present paper examines these charges. To do so, the author traces the behaviour of domestic money markets to find the sources creating the international liquidity base, or international monetary base, and see what use the international money markets make of this base.

JEL: E52, F31, E51, E44