Emerging Market Economies and the Next Reserve Currencies
26 Pages Posted: 3 Dec 2014
Date Written: September 24, 2014
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: Suggested Citation