Financial intermediation and fragility: the role of the periphery

A peculiar feature of the present international economy is that the leading 'hegemonic' country, USA, has a large and mounting external deficit which it finances by issuing debt in its own currency. The US can be seen to be at the apex of a pattern of triangular payments recycling the surpluses of creditor countries to debtor countries in the periphery. The paper shows, within a stock-flow-consistent framework, how capital flight from debtor periphery countries, by precipitating a shift from assets denominated in domestic currency to those denominated in dollars, acts like a safety valve for the international monetary system.