Multiple Reserve Currencies and Renminbi Use
Posted: 14 Jun 2018
Date Written: July 5, 2017
We analyze prospects for the Chinese renminbi to become a major international currency, along with the US dollar, in a multiple reserve currency world. Analytical models on switching costs in networks and on currency choice under direct and indirect transaction costs are used to derive variables for empirical analysis. While network size and financial market depth (lower transaction costs) favor incumbents, changes in trade-related bargaining power and in currency volatility could favor newcomers. The models also point to political determinants affecting currency choice. We develop indices to quantify some of these. When the bargaining power index is used in estimation, it shows capital account openness and currency stability have to complement a rise in trade share for an aspiring reserve currency.
Keywords: Reserve Currencies; Network Benefits; Transaction Costs; Bargaining Power; Renminbi
JEL Classification: F33; F55; O53
Suggested Citation: Suggested Citation