Disturbing Facts and Ominous Danger Signals: A Modern-Day Revisitation of Triffin’s Paradox Through Global Dollar Reserve Demand and US External Deficits

Bona Yoo, Harvard College, 2026. The persistence of the modern-day Triffin mechanism — by which foreign official demand for dollar reserves outpaces US fiscal capacity — sits at the center of contemporary macroeconomic debate. Employing a cross-country panel regression with fixed effects across 135 countries from 1970 to 2025, I extend Steiner's (2014) framework using OLS and 2SLS frameworks to isolate the effect of reserve accumulation on current account balances and determine whether foreign demand for dollar reserves systematically deteriorates the US deficits. In a departure from the pre-2010 period, I find that the correlation between official capital inflows and the US current account deficit has reversed sign: an additional dollar of accumulated reserves is associated with an improvement in the current account balance by 30 cents. Upon controlling for foreign official holdings of US government securities, however, the negative correlation not only resurfaces but deepens: at average Treasury ownership, an additional dollar of accumulated reserves is associated with a $1.62 deterioration of the US current account ($1.73-1.74 upon addressing endogeneity concerns). The implications are two-fold: first, the empirical contours of the Triffin mechanism persist and, if anything, have grown more acute. More remarkably, these indicators have been masked by a structural shift in foreign official portfolios away from debt instruments and toward US equities, a phenomenon directly connected to the reversal of US exorbitant privilege.