The Future of International Liquidity and the Role of China

27 Pages Posted: 9 Feb 2013  

Alan M. Taylor

University of California, Davis - Department of Economics; University of Virginia - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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Date Written: February 2013

Abstract

This paper analyzes the consequences of the internationalization of the Chinese renminbi for the global monetary system and its possible ascension to reserve currency status. In an unstable and financially integrated world, governments' precautionary demand for reserve assets is likely to increase. But the world then risks a third crisis of the global reserve system, another re-run of the Triffin paradox, with an ever-growing emerging-world insurance demand loaded onto a small group of ever more strained net debt suppliers. Two ways to avoid this outcome would entail either expanding the supply of credible reserve liquidity to include some large emerging-market providers, or finding ways to manage emerging-market risks so as to moderate the perceived need for insurance, and China would have to loom large in both solutions.

Suggested Citation

Taylor, Alan M., The Future of International Liquidity and the Role of China (February 2013). NBER Working Paper No. w18771. Available at SSRN: https://ssrn.com/abstract=2214221

Alan M. Taylor (Contact Author)

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