BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 20/2015:
The geographic distribution of international currencies and RMB internationalization
Qing He ()
, Iikka Korhonen ()
, Junjie Guo and Fangge Liu
Abstract: The paper investigates the determinants of geographical
distribution of international currencies in global financial market
transactions. We implement a gravity model, in which international currency
distribution depends on the characteristics of the source and destination
countries. We find that the source country’s currency is more likely to be
used in the financial market transactions of the destination country if the
bilateral trade and capital flows are large or the destination country’s
economy is the larger of the two. We also find that the level of
development of the destination country’s financial market and whether the
two countries use a common language are important determinants of the
currency distribution. In addition, our model suggests that, to be a true
international currency, the renminbi should be used more extensively in the
financial markets of the US and UK.
Keywords: currency internationalization; distribution of currencies; gravity model; (follow links to similar papers)
JEL-Codes: F33; F36; G15; (follow links to similar papers)
33 pages, June 3, 2015
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