The Renminbi's Role in the Global Monetary System

106 Pages Posted: 12 Feb 2012

See all articles by Eswar S. Prasad

Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management; Cornell University - Department of Economics; Brookings Institution; NBER; IZA Institute of Labor Economics

Lei Sandy Ye

World Bank

Abstract

We analyze three related but distinct concepts concerning the renminbi's role in the global monetary system: (i) "internationalization" of the currency; (ii) currency convertibility; and (iii) reserve currency status. Their sequencing in relation to other policy goals such as financial sector reforms and exchange rate flexibility will affect their benefit-risk tradeoffs. We describe the measures taken and progress attained in each of these areas, and discuss the implications of these changes for the balance and sustainability of China's own economic development as well as the associated implications for the global monetary system. While China is actively promoting the internationalization of its currency, it is a long way from attaining full convertibility or meeting other prerequisites for achieving reserve currency status. Ultimately, China will proceed with capital account convertibility in its own controlled and gradual manner, with the goal being an open capital account but with significant administrative and other "soft" controls. The renminbi will play an increasingly important role in the international monetary system but is unlikely to displace the U.S. dollar anytime soon.

Keywords: international monetary system, reserve currency, capital account liberalization, convertibility, exchange rate flexibility

JEL Classification: F3

Suggested Citation

Prasad, Eswar S. and Ye, Lei Sandy, The Renminbi's Role in the Global Monetary System. IZA Discussion Paper No. 6335, Available at SSRN: https://ssrn.com/abstract=2003668 or http://dx.doi.org/10.2139/ssrn.2003668

Eswar S. Prasad (Contact Author)

Cornell University - Dyson School of Applied Economics and Management ( email )

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HOME PAGE: http://prasad.aem.cornell.edu

Cornell University - Department of Economics ( email )

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Brookings Institution ( email )

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NBER ( email )

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IZA Institute of Labor Economics

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Lei Sandy Ye

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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