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Currency Development Through Liquidity Provision

Author

Listed:
  • Coppola, Antonio
  • Krishnamurthy, Arvind
  • Xu, Chenzi

Abstract

Drawing on the experiences of the historical Eurodollar market and recent Chinese dollar bond issuances traded outside U.S. jurisdiction at negative spreads to Treasurys, we examine the conditions under which a parallel offshore dollar financial system that circumvents Western sanctions may emerge. We propose a model in which currency use is driven by liquidity provision and safe bond supply. We characterize three equilibrium regimes: high convenience yields emerge in both the initial sanctions-driven region and the final liquidity-driven region, separated by an intermediate region. Transitions between equilibria depend on safe-asset supply and liquidity technologies, in addition to endogenous dynamic complementarities.

Suggested Citation

  • Coppola, Antonio & Krishnamurthy, Arvind & Xu, Chenzi, 2025. "Currency Development Through Liquidity Provision," CEPR Discussion Papers 19894, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19894
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    File URL: https://cepr.org/publications/DP19894
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    Keywords

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    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-

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