Jumpstarting an international currency: Case of Chinese Renminbi

Interesting Bank of England WP by Saleem Bahaj and Ricardo Reis:

This paper suggested that international currency status depends on the financial cost of working capital credit, and that this is affected by central bank policies. A model of the complementarity between the currency choice for credit and the currency choice for invoicing revealed thresholds for key economic variables that a rising currency must meet before it becomes used overseas. Most currencies do not meet these thresholds, justifying why so few are international. But for some, policy can shift the thresholds and so jumpstart the currency. Empirically, we used the RMB swap lines to test for the effects of policy, and for the role of these thresholds and complementarities. We estimated a 13 percentage point increase in the probability of a country making or receiving RMB payments as a result of the swap lines, and an increase in the RMB share of payments of 0.4 percentage points.

Drawing the comparison with the similar actions of the Federal Reserve one century ago, the RMB is today much less used than the USD was back in 1925. In part, perhaps this is because the RMB capital markets continue to be subject to many controls. Moreover, there was no shock threatening the USD in the last decade the way that World War I closed the GBP market. The experience of the USD suggests that Chinese policymakers can do much more if they want the RMB to rise further.

Our goal was positive rather than normative. Whether the swap lines were the best tool to trigger the jumpstart, and whether the costs of policies do not outweigh the benefits of having an international currency, are questions that we did not ask or answer. Neither did we address whether the central bank is the right agent to be pursuing this promotion, how should it interact with fiscal authorities, and what are the implications for the exchange rate regime and capital flows. These are all left for future work. 

 

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