Emerging Market Economies and the Next Reserve Currencies

26 Pages Posted: 3 Dec 2014

See all articles by Menzie David Chinn

Menzie David Chinn

University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 24, 2014

Abstract

It is most likely that the current reserve currencies will retain their status in the near future, given the persistence in the composition of reserve holdings. However, since we do not have complete data on the switchovers in lead reserve currencies, a great deal of uncertainty attends any forecasts. Hence, it is possible that new reserve currencies might appear with greater rapidity than anticipated. Of the candidates for new reserve currencies among the major emerging economies, the renminbi (RMB) is the most plausible. However, even under optimistic assumptions regarding economic growth and financial development, RMB status as a major reserve currency is some time off. A role for regional reserve currency status in the near future is much more likely. The advent of a multi-reserve currency world is unlikely to have negative consequences for global financial stability (and might be stability-enhancing). However, achieving the prerequisites for reserve currency status will force sacrifices in terms of policy autonomy. In addition, reserve currency status might reduce international competitiveness for individual countries, as higher currency demand appreciates their currencies.

Keywords: foreign exchange reserves, financial development, capital controls, seignorage, exorbitant privilege, monetary autonomy

JEL Classification: F31, G15

Suggested Citation

Chinn, Menzie David, Emerging Market Economies and the Next Reserve Currencies (September 24, 2014). Available at SSRN: https://ssrn.com/abstract=2505239 or http://dx.doi.org/10.2139/ssrn.2505239

Menzie David Chinn (Contact Author)

University of Wisconsin, Madison - Robert M. La Follette School of Public Affairs and Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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