Reserve Currency Blocs: A Changing International Monetary System?

Abstract

What is the extent of currency diversification in the international monetary system? How hasit evolved over time? In this paper, we quantify the degree of currency diversification usingregression methods of currency co-movements to determine the extent to which nationalcurrencies across the world belong to a reserve currency bloc. We then use these estimates tocalculate the economic size of each currency bloc. A key contribution of our paper is that wequantify the size of the Chinese renminbi bloc. Our analysis suggests that the internationalmonetary system has transitioned from a bi-polar system - consisting of the U.S. dollar andthe euro - to a tri-polar one that includes the renminbi. The dollar bloc is estimated tocontinue to dominate, having the largest share in global GDP (40 percent), followed by therenminbi (30 percent) and the euro blocs (20 percent). The geographical area of influence forthe RMB bloc appears to be most evident among the BRICS' currencies. The British poundand the Japanese yen blocs appear to play minor roles.

Keywords: Economic integration, Foreign exchange, International monetary system, Currency Bloc, Internatinal Monetary System, International Monetary Arrangements and Institutions, Financial Aspects of Economic Integration, Open Economy Macroeconomics

JEL Classification: F15, F31, F33, F36, F41, O24