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Offshore markets for the domestic currency: monetary and financial stability issues

Author

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  • Dong He
  • Robert McCauley

Abstract

We show in this paper that offshore markets intermediate a large chunk of financial transactions in major reserve currencies such as the US dollar. We argue that, for emerging market economies that are interested in seeing some international use of their currencies, offshore markets can help to increase the recognition and acceptance of the currency while still allowing the authorities to retain a measure of control over the pace of capital account liberalisation. The development of offshore markets could pose risks to monetary and financial stability in the home economy which need to be prudently managed. The experience of the Federal Reserve and of the authorities of the other major reserve currency economies in dealing with the euromarkets shows that policy options are available for managing such risks.

Suggested Citation

  • Dong He & Robert McCauley, 2010. "Offshore markets for the domestic currency: monetary and financial stability issues," BIS Working Papers 320, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:320
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    References listed on IDEAS

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    1. Glenn D. Rudebusch & Eric T. Swanson & Tao Wu, 2006. "The Bond Yield "Conundrum" from a Macro-Finance Perspective," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 24(S1), pages 83-109, December.
    2. Dale W. Henderson & Douglas G. Waldo, 1980. "Reserve requirements on Eurocurrency deposits: implications for Eurodeposit multipliers, control of a monetary aggregate, and avoidance of redenomination incentives," International Finance Discussion Papers 164, Board of Governors of the Federal Reserve System (U.S.).
    3. Aliber, Robert Z., 1980. "The integration of the offshore and domestic banking system," Journal of Monetary Economics, Elsevier, vol. 6(4), pages 509-526, October.
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    5. Anella Munro & Philip Wooldridge, 2011. "Motivations for swap-covered foreign currency borrowing," BIS Papers chapters,in: Bank for International Settlements (ed.), Currency internationalisation: lessons from the global financial crisis and prospects for the future in Asia and the Pacific, volume 61, pages 19-56 Bank for International Settlements.
    6. Yin-Wong Cheung & Guonan Ma & Robert N. McCauley, 2009. "Renminbisation des actifs internationaux de la Chine," Revue d'Économie Financière, Programme National Persée, vol. 95(2), pages 135-155.
    7. Robert N. McCauley & Rama Seth, 1992. "Foreign bank credit to U.S. corporations: the implications of offshore loans," Quarterly Review, Federal Reserve Bank of New York, issue Spr, pages 52-65.
    8. Francis E. Warnock & Veronica C. Warnock, 2005. "International Capital Flows and U.S. Interest Rates," The Institute for International Integration Studies Discussion Paper Series iiisdp103, IIIS.
    9. Hans Genberg, 2011. "Currency internationalisation: analytical and policy issues," BIS Papers chapters,in: Bank for International Settlements (ed.), Currency internationalisation: lessons from the global financial crisis and prospects for the future in Asia and the Pacific, volume 61, pages 221-230 Bank for International Settlements.
    10. Patrick McGuire & Goetz von Peter, 2009. "The US dollar shortage in global banking," BIS Quarterly Review, Bank for International Settlements, March.
    11. Naohiko Baba & Robert N McCauley & Srichander Ramaswamy, 2009. "US dollar money market funds and non-US banks," BIS Quarterly Review, Bank for International Settlements, March.
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    Citations

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    Cited by:

    1. Xiaoli Chen & Yin‐Wong Cheung, 2011. "Renminbi Going Global," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 19(2), pages 1-18, March.
    2. Dong He & Paul Luk & Wenlang Zhang, 2016. "Internationalisation of the Renminbi as an Investing and a Funding Currency: Analytics and Prospects," Pacific Economic Review, Wiley Blackwell, vol. 21(3), pages 295-323, August.
    3. He, Qing & Korhonen, Iikka & Guo, Junjie & Liu, Fangge, 2016. "The geographic distribution of international currencies and RMB internationalization," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 442-458.
    4. Shu, Chang & He, Dong & Cheng, Xiaoqiang, 2015. "One currency, two markets: the renminbi's growing influence in Asia-Pacific," China Economic Review, Elsevier, vol. 33(C), pages 163-178.
    5. Dong He & Robert N McCauley, 2012. "Eurodollar banking and currency internationalisation," BIS Quarterly Review, Bank for International Settlements, June.
    6. David Leung & John Fu, 2014. "Interactions between CNY and CNH Money and Forward Exchange Markets," Working Papers 132014, Hong Kong Institute for Monetary Research.
    7. World Bank & P.R.C. Development Research Center of the State Council, 2012. "China 2030 : Building a Modern, Harmonious, and Creative High-Income Society [pre-publication version]," World Bank Publications, The World Bank, number 6057, November.
    8. Robert N. McCauley, 2013. "Renminbi internationalisation and China’s financial development," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 11(2), pages 101-115, May.
    9. Robert N McCauley & Jean-François Rigaudy, 2011. "Managing foreign exchange reserves in the crisis and after," BIS Papers chapters,in: Bank for International Settlements (ed.), Portfolio and risk management for central banks and sovereign wealth funds, volume 58, pages 19-47 Bank for International Settlements.
    10. Barbara Fritz & Daniela Prates, 2013. "Beyond capital controls: the regulation of foreign currency derivatives markets in South Korea and Brazil after the global financial crisis," Competence Centre on Money, Trade, Finance and Development 1307, Hochschule fuer Technik und Wirtschaft, Berlin.
    11. He, Dong, 2012. "Renminbi Internationalisation: A Primer," MPRA Paper 40672, University Library of Munich, Germany.
    12. Hyoung-kyu Chey, 2013. "The Concepts, Consequences, and Determinants of Currency Internationalization," GRIPS Discussion Papers 13-03, National Graduate Institute for Policy Studies.
    13. Qianying Chen & Andrew Filardo & Dong He & Feng Zhu, 2012. "International spillovers of central bank balance sheet policies," BIS Papers chapters,in: Bank for International Settlements (ed.), Are central bank balance sheets in Asia too large?, volume 66, pages 220-264 Bank for International Settlements.
    14. Renu Kohli & Pravakar Sahoo & M. Shuheb Khan, 2017. "Developing India's Offshore Local Currency Bond Market: Lessons from Emerging Countries," Working Papers id:12039, eSocialSciences.
    15. repec:bla:ausecp:v:55:y:2016:i:4:p:434-450 is not listed on IDEAS
    16. repec:bof:bofitp:urn:nbn:fi:bof-201506101281 is not listed on IDEAS

    More about this item

    Keywords

    offshore markets; currency internationalisation; monetary stability; financial stability;

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • 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

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