China's Dominance Hypothesis and the Emergence of a Tri-Polar Global Currency System

42 Pages Posted: 22 Dec 2011

See all articles by Marcel Fratzscher

Marcel Fratzscher

DIW Berlin; Centre for Economic Policy Research (CEPR)

Arnaud Mehl

European Central Bank (ECB)

Multiple version iconThere are 3 versions of this paper

Date Written: November 2011

Abstract

This paper assesses whether the international monetary system is already tri-polar and centred around the US dollar, the euro and the Chinese renminbi (RMB). It focuses on what we call China's "dominance hypothesis", i.e. whether the renminbi is already the dominant currency in Asia, exerting a large influence on exchange rate and monetary policies in the region, a direct reference to the old "German dominance hypothesis" which ascribed to the German mark a dominant role in Europe in the 1980s-1990s. Using a global factor model of exchange rates and a complementary event study, we find evidence that the RMB has become a key driver of currency movements in emerging Asia since the mid-2000s, and even more so since the global financial crisis. These results are consistent with China's dominance hypothesis and with the view that the international monetary system is already tri-polar. However, we also find that China's currency movements are to some extent affected by those in the rest of Asia.

Keywords: China, euro, exchange rates, German dominance hypothesis, International monetary system, renminbi, tri-polarity, US dollar

JEL Classification: F30, F31, F33, N20

Suggested Citation

Fratzscher, Marcel and Mehl, Arnaud, China's Dominance Hypothesis and the Emergence of a Tri-Polar Global Currency System (November 2011). CEPR Discussion Paper No. DP8671. Available at SSRN: https://ssrn.com/abstract=1976013

Marcel Fratzscher (Contact Author)

DIW Berlin ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Arnaud Mehl

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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