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Jumpstarting an International Currency

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Abstract
Monetary and financial policies that lower the cost of credit for working capital in a currency outside of its country can provide the impetus for that currency to be used in international trade. This paper shows this in theory, by exploring the complementarity in the currency used for financing working capital and the currency used for invoicing sales. Financial policies by a central bank can jump-start the use of its currency outside a country's borders. In the data, the creation of 38 swap lines by the People's Bank of China between 2009 and 2018 provides a test of the theory. Signing a swap line with a country is significantly associated with increases in the use of the RMB in payments to and from that country in the following months.

Suggested Citation

  • Bahaj, Saleem, 2020. "Jumpstarting an International Currency," CEPR Discussion Papers 14793, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14793
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    2. Ethan Ilzetzki & Carmen M Reinhart & Kenneth S Rogoff, 2020. "Why is the euro punching below its weight?," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 35(103), pages 405-460.
    3. Natalie Chen & Wanyu Chung & Dennis Novy, 2022. "Vehicle Currency Pricing and Exchange Rate Pass-Through," Journal of the European Economic Association, European Economic Association, vol. 20(1), pages 312-351.
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    Cited by:

    1. Corsetti, Giancarlo & Crowley, Meredith & Han, Lu, 2022. "Invoicing and the dynamics of pricing-to-market: Evidence from UK export prices around the Brexit referendum," Journal of International Economics, Elsevier, vol. 135(C).
    2. Georgiadis, Georgios & Le Mezo, Helena & Mehl, Arnaud & Tille, Cédric, 2021. "Fundamentals vs. policies: can the US dollar’s dominance in global trade be dented?," Working Paper Series 2574, European Central Bank.
    3. Marina Zucker‐Marques & Pedro Perfeito da Silva, 2022. "The Role of Institutions: A Cross‐country Analysis of Renminbi Trading in Foreign Exchange Markets," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 30(3), pages 42-74, May.
    4. Leander Bindewald, 2021. "Inconsistent Definitions of Money and Currency in Financial Legislation as a Threat to Innovation and Sustainability," JRFM, MDPI, vol. 14(2), pages 1-17, January.
    5. Benigno, Pierpaolo & Schilling, Linda M. & Uhlig, Harald, 2022. "Cryptocurrencies, currency competition, and the impossible trinity," Journal of International Economics, Elsevier, vol. 136(C).
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    7. Lodge, David & Pérez, Javier J. & Albrizio, Silvia & Everett, Mary & De Bandt, Olivier & Georgiadis, Georgios & Ca' Zorzi, Michele & Lastauskas, Povilas & Carluccio, Juan & Parrága, Susana & Carvalho,, 2021. "The implications of globalisation for the ECB monetary policy strategy," Occasional Paper Series 263, European Central Bank.
    8. Boz, Emine & Casas, Camila & Georgiadis, Georgios & Gopinath, Gita & Le Mezo, Helena & Mehl, Arnaud & Nguyen, Tra, 2020. "Patterns in invoicing currency in global trade," Working Paper Series 2456, European Central Bank.
    9. He, Qing & Liu, Junyi & Yu, Jishuang, 2023. "Dancing with dragon: The RMB and developing economies’ currencies," Research in International Business and Finance, Elsevier, vol. 64(C).
    10. Zucker Marques, Marina, 2021. "Financial statecraft and transaction costs: The case of renminbi internationalization," Discussion Papers 2021/9, Free University Berlin, School of Business & Economics.
    11. Florez-Orrego, Sergio & Maggiori, Matteo & Schreger, Jesse & Sun, Ziwen & Tinda, Serdil, 2023. "Global Capital Allocation," SocArXiv 5s6n3, Center for Open Science.
    12. Boz, Emine & Casas, Camila & Georgiadis, Georgios & Gopinath, Gita & Le Mezo, Helena & Mehl, Arnaud & Nguyen, Tra, 2022. "Patterns of invoicing currency in global trade: New evidence," Journal of International Economics, Elsevier, vol. 136(C).
    13. Mitchener, Kris & Trebesch, Christoph, 2021. "Sovereign Debt in the 21st Century: Looking Backward, Looking Forward," CEPR Discussion Papers 15935, C.E.P.R. Discussion Papers.
    14. Daisuke Ikeda, 2020. "Digital Money as a Unit of Account and Monetary Policy in Open Economies," IMES Discussion Paper Series 20-E-15, Institute for Monetary and Economic Studies, Bank of Japan.
    15. Eren, Egemen & Malamud, Semyon, 2022. "Dominant currency debt," Journal of Financial Economics, Elsevier, vol. 144(2), pages 571-589.
    16. Mukhin, Dmitry, 2022. "An equilibrium model of the international price system," LSE Research Online Documents on Economics 112500, London School of Economics and Political Science, LSE Library.
    17. Liu, Tao & Wang, Xiaosong & Woo, Wing Thye, 2022. "The rise of Renminbi in Asia: Evidence from Network Analysis and SWIFT dataset," Journal of Asian Economics, Elsevier, vol. 78(C).
    18. Christopher Clayton & Amanda Dos Santos & Matteo Maggiori & Jesse Schreger, 2022. "Internationalizing Like China," NBER Working Papers 30336, National Bureau of Economic Research, Inc.
    19. Antoine Berthou, 2023. "International sanctions and the dollar: Evidence from trade invoicing," Working papers 924, Banque de France.
    20. Alina Iancu & Gareth Anderson & Sakai Ando & Ethan Boswell & Andrea Gamba & Shushanik Hakobyan & Lusine Lusinyan & Neil Meads & Yiqun Wu, 2022. "Reserve Currencies in an Evolving International Monetary System," Open Economies Review, Springer, vol. 33(5), pages 879-915, November.
    21. Hao, Kaixuan & Han, Liyan & Li, (Tony) Wei, 2022. "The impact of China's currency swap lines on bilateral trade," International Review of Economics & Finance, Elsevier, vol. 81(C), pages 173-183.

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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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