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Renminbi Rules: The Conditional Imminence of the Reserve Currency Transition

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  • Arvind Subramanian

    ()
    (Peterson Institute for International Economics)

Abstract

Against the backdrop of the recent financial crisis and the ongoing rapid changes in the world economy, the fate of the dollar as the premier international reserve currency is under scrutiny. This paper attempts to answer whether the Chinese renminbi will eclipse the dollar, what will be the timing of, and the prerequisites for this transition, and which of the two countries controls the outcome. The key finding, based on analyzing the last 110 years, is that the size of an economy—measured not just in terms of GDP but also trade and the strength of the external financial position—is the key fundamental correlate of reserve currency status. Further, the conventional view that sterling persisted well beyond the strength of the UK economy is overstated. Although the United States overtook the United Kingdom in terms of GDP in the 1870s, it became dominant in a broader sense encompassing trade and finance only at the end of World War I. And since the dollar overtook sterling in the mid-1920s, the lag between currency dominance and economic dominance was about 10 years rather than the 60-plus years traditionally believed. Applying these findings to the current context suggests that the renminbi could become the premier reserve currency by the end of this decade, or early next decade. But China needs to fulfill a number of conditions—making the reniminbi convertible and opening up its financial system to create deep and liquid markets—to realize renminbi preeminence. China seems to be moving steadily in that direction, and renminbi convertibility will proceed apace not least because it offers China's policymakers a political exit out of its mercantilist growth strategy. The United States cannot in any serious way prevent China from moving in that direction.

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Bibliographic Info

Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP11-14.

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Date of creation: Sep 2011
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Handle: RePEc:iie:wpaper:wp11-14

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Keywords: Reserve Currency; Dollar; Sterling; Renminbi; China;

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References

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  2. Schenk,Catherine R., 2010. "The Decline of Sterling," Cambridge Books, Cambridge University Press, number 9780521876971.
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Cited by:
  1. Frankel, Jeffrey, 2012. "Internationalization of the RMB and Historical Precedents," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 27, pages 329-365.
  2. Pedro BAÇÃO & António Portugal DUARTE & Mariana SIMÕES, 2013. "The International Monetary System in Flux: Overview and Prospects," Chapters of Financial Aspects of Recent Trends in the Global Economy book, in: Rajmund Mirdala (ed.), Financial Aspects of Recent Trends in the Global Economy, volume 1, chapter 10, pages 192-206 ASERS Publishing.
  3. Volz, Ulrich, 2013. "RMB internationalisation and currency co-operation in East Asia," Working Papers 125, University of Leipzig, Faculty of Economics and Management Science.
  4. Eichengreen, Barry & Mehl, Arnaud & Chiţu, Livia, 2012. "When did the dollar overtake sterling as the leading international currency? Evidence from the bond markets," Working Paper Series 1433, European Central Bank.

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