The purpose of this study is to explore the relationship between the political economic variable (democracy) and the store of value function (reserve currency) of international reserve currencies.
This study used pooled OLS and instrumental variable regression methodology with panel data from eight major reserve currencies for the period 2016–2024. We examine the impact of three principles of democracy – deliberative democracy, electoral democracy and participatory democracy – on determining the shares of international reserve currencies in official global central bank reserves.
This study's results show that all three principles of democracy are significant and positively influencing the shares of international reserve currencies. Our findings also indicate that the participatory democracy index is more important than the deliberative democracy index. Interestingly, the coefficient for the electoral democracy index is the lowest among the three democracy indices in determining reserve currency shares.
The implications of these results hold practical value for heads of state, central bankers and policymakers involved in managing the currency internationalisation process in both advanced and emerging economies.
This study contributes to theory by introducing a new variable (democracy) as a determinant of currency internationalisation. This contribution strengthens the theoretical foundation for academics and scholars working in the domain of international currencies.
