Discussion Paper Series 2010-E-20

Exorbitant Privilege and Exorbitant Duty

Pierre-Olivier Gourinchas, Helene Rey, Nicolas Govillot

We update and improve the Gourinchas and Rey (2007a) dataset of the historical evolution of US external assets and liabilities at market value since 1952 to include the recent crisis period. We find strong evidence of a sizeable excess return of gross assets over gross liabilities. The center country of the International Monetary System enjoys an “exorbitant privilege” that significantly weakens its external constraint. In exchange for this “exorbitant privilege” we document that the US provides insurance to the rest of the world, especially in times of global stress. This “exorbitant duty” is the other side of the coin. During the 2007-2009 global financial crisis, payments from the US to the rest of the world amounted to 19 percent of US GDP. We present a stylized model that accounts for these facts.

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

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