0
$\begingroup$

There are readily available "definitions" including on this site, but I want to know what they are in a concrete sense. Because the definitions make them basically sound like just electronic bank deposits in dollars at a foreign commercial bank, but in a literal sense this seems nonsensical unless those foreign banks (or the central bank in their country) have accounts at the US Fed. After all, to a commercial bank, electronic deposits are just a local accounting fiction, the movement of which gets accounted for at the end of the day by a net transfer of central bank reserves. So are they US treasury securities? or physical cash? or do foreign banks indeed have accounts at the fed?

$\endgroup$

1 Answer 1

2
$\begingroup$

They actually literary are a deposit accounts of US dollars outside US. Also no those foreign banks will not generally have accounts at Fed. In fact one of the reasons why eurodollar deposits pay higher interest than a dollar deposit in US as they are more risky since they are neither subject to FDIC insurance and those banks will not get liquidity from Fed if there is run on them.

After all, to a commercial bank, electronic deposits are just a local accounting fiction, the movement of which gets accounted for at the end of the day by a net transfer of central bank reserves.

But there is no 1:1 correspondence between amount of dollars in circulation and Fed reserves. You can have a look at Fred data for volume of reserves and money stock $M2$ and you can see that at any point in time money stock is several orders of magnitude larger than volume of reserves.

If you want to know how eurodollars work on conceptual level then have a look at Niehans, & Hewson (1976).

Actually a good primer was also provided by Milton Friedman (1971). Friedman, also includes concrete example.

$\endgroup$
9
  • $\begingroup$ Thank you for your help. Then please help me try to understand something: if i were to transfer my dollars in a euro dollar account at a British bank to an American bank, what in the most concrete sense actually happens? If it were american bank to american bank, it would manifest in an end-of-day transfer of central bank reserves at the fed. but since the british bank has no account at the fed, how is that literally transacted? $\endgroup$ Oct 3, 2020 at 18:57
  • $\begingroup$ (also I do understand that electronic bank credit is many times greater in quantity than central bank reserves. that, at least, is not one of the many sources of my confusion) $\endgroup$ Oct 3, 2020 at 19:02
  • $\begingroup$ @Timkinsella I added a reference to Milton Friedman (1971), can you have look at his paper? the paper is very short and it literary has example with all accounting that goes on. I think Friedman explains it belter than I ever could him being famous for his writing. $\endgroup$
    – 1muflon1
    Oct 3, 2020 at 19:03
  • $\begingroup$ I will! thank you again for your help $\endgroup$ Oct 3, 2020 at 19:04
  • $\begingroup$ @Timkinsella you are welcome. you can also go directly to section "hypothetical example" if you only want to see the example itself. $\endgroup$
    – 1muflon1
    Oct 3, 2020 at 19:05

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.