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Currency internationalisation: analytical and policy issues

In: Currency internationalisation: lessons from the global financial crisis and prospects for the future in Asia and the Pacific

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  • Hans Genberg

    (Hong Kong Monetary Authority)

Abstract

Interest in currency internationalisation among policy makers as well as the general public has intensified in recent years. One reason is a view that the global impact of the recent financial crisis has been intensified because of the dominant role of the US dollar in the international financial system. According to this view the system would be less prone to instability if international trade in goods and assets were denominated in a greater variety of currencies and if international reserve holdings were more diversified. Another reason is the perception that having an international currency is associated with significant benefits for the issuing national authorities. This raises the question whether there is a case for policy intervention by national authorities to promote the international use of their currency. This paper addresses this issue. It argues that authorities should not focus their primary attention on climbing the currency internationalization charts. Instead they should consider the pros and cons of policies and institutional changes that may pave the way for the private adoption of the currency in international transactions. The reason is that full internationalization of a currency will not come about unless a certain number of pre-requisites are met. Arguably the most important is that there be no restrictions on cross-border transfers of funds and no restrictions on third party use of the currency in contracts and settlements of trade in goods or assets, and no restriction on including assets denominated in the currency in private or official portfolios. In short, full internationalization of a currency requires full capital account liberalisation. Although there are gains from currency internationalisation, it is an open question whether public policy should attempt to promote it beyond establishing preconditions such as full capital account liberalisation, a deep and dynamic domestic financial market, a well-respected legal framework for con

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This chapter was published in:

  • Bank for International Settlements, 2011. "Currency internationalisation: lessons from the global financial crisis and prospects for the future in Asia and the Pacific," BIS Papers, Bank for International Settlements, Bank for International Settlements, number 61, 8.
    This item is provided by Bank for International Settlements in its series BIS Papers chapters with number 61-17.

    Handle: RePEc:bis:bisbpc:61-17

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    1. Chinn, Menzie & Frankel, Jeffrey, 2008. "The Euro May over the Next 15 Years Surpass the Dollar as Leading International Currency," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp08-016, Harvard University, John F. Kennedy School of Government.
    2. Barry Eichengreen, 2005. "Sterling's Past, Dollar's Future: Historical Perspectives on Reserve Currency Competition," NBER Working Papers 11336, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Dong He & Robert McCauley, 2010. "Offshore markets for the domestic currency: monetary and financial stability issues," BIS Working Papers 320, Bank for International Settlements.
    2. Xiaoli Chen & Yin-Wong Cheung, 2011. "Renminbi Going Global," Working Papers, Hong Kong Institute for Monetary Research 082011, Hong Kong Institute for Monetary Research.
    3. Frankel, Jeffrey, 2012. "Internationalization of the RMB and Historical Precedents," Journal of Economic Integration, Center for Economic Integration, Sejong University, Center for Economic Integration, Sejong University, vol. 27, pages 329-365.

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