Renminbi Rules: The Conditional Imminence of the Reserve Currency Transition
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.
|Date of creation:||Sep 2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.piie.com
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ocampo José Antonio, 2010. "Building an SDR-Based Global Reserve System," Journal of Globalization and Development, De Gruyter, vol. 1(2), pages 1-15, December.
- Richard Portes & Helene Rey, 1998.
"The Emergence of the Euro as an International Currency,"
NBER Working Papers
6424, National Bureau of Economic Research, Inc.
- Richard Portes & Hélène Rey, 1998. "The emergence of the euro as an international currency," Economic Policy, CEPR;CES;MSH, vol. 13(26), pages 305-343, 04.
- Alogoskoufis, G. & Portes, R. & Rey, H., 1997. "The Emergence of the Euro as an International Currency," DELTA Working Papers 97-28, DELTA (Ecole normale supérieure).
- Alogoskoufis, George & Portes, Richard & Rey, Hélène, 1997. "The Emergence of the Euro as an International Currency," CEPR Discussion Papers 1741, C.E.P.R. Discussion Papers.
- G Alogoskoufis & R Portes & H Rey, 1998. "The Emergence of the Euro as an International Currency," CEP Discussion Papers dp0388, Centre for Economic Performance, LSE.
- Barry Eichengreen & Marc Flandreau, 2008. "The Rise and Fall of the Dollar, or When Did the Dollar Replace Sterling as the Leading International Currency?," NBER Working Papers 14154, National Bureau of Economic Research, Inc.
- Rey, Helene, 2001.
"International Trade and Currency Exchange,"
Review of Economic Studies,
Wiley Blackwell, vol. 68(2), pages 443-64, April.
- John F. O. Bilson & Richard C. Marston, 1984. "Exchange Rate Theory and Practice," NBER Books, National Bureau of Economic Research, Inc, number bils84-1, June.
- Carmen M. Reinhart, 2010. "This Time is Different Chartbook: Country Histories on Debt, Default, and Financial Crises," NBER Working Papers 15815, National Bureau of Economic Research, Inc.
- Bandholz, Harm & Clostermann, Jörg & Seitz, Franz, 2007.
"Explaining the US bond yield conundrum,"
OTH im Dialog: Weidener Diskussionspapiere
2, University of Applied Sciences Amberg-Weiden (OTH).
- repec:cup:cbooks:9780521876971 is not listed on IDEAS
- Richard H. Clarida, 2007.
"G7 Current Account Imbalances: Sustainability and Adjustment,"
National Bureau of Economic Research, Inc, number clar06-2, June.
- Richard H. Clarida, 2006. "G7 Current Account Imbalances: Sustainability and Adjustment," NBER Working Papers 12194, National Bureau of Economic Research, Inc.
- Capie, Forrest & Goodhart, Charles, 1995. "Central banks, macro policy, and the financial system; the nineteenth and twentieth centuries," Financial History Review, Cambridge University Press, vol. 2(02), pages 145-161, October.
- Richard H. Clarida, 2007. "Introduction to "G7 Current Account Imbalances: Sustainability and Adjustment"," NBER Chapters, in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 1-10 National Bureau of Economic Research, Inc.
- Mitchener, Kris James, 2006. "Global Capitalism: Its Fall and Rise in the Twentieth Century. By Jeffry A. Frieden. New York: W.W. Norton Company, 2006. Pp. xvii, 556. $29.95," The Journal of Economic History, Cambridge University Press, vol. 66(03), pages 846-848, September.
- Craine Roger & Martin Vance L, 2009. "Interest Rate Conundrum," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-29, March.
- Francis E. Warnock & Veronica C. Warnock, 2005.
"International Capital Flows and U.S. Interest Rates,"
The Institute for International Integration Studies Discussion Paper Series
- Francis E. Warnock & Veronica C. Warnock, 2005. "International capital flows and U.S. interest rates," International Finance Discussion Papers 840, Board of Governors of the Federal Reserve System (U.S.).
- Francis E. Warnock & Veronica Cacdac Warnock, 2006. "International Capital Flows and U.S. Interest Rates," NBER Working Papers 12560, National Bureau of Economic Research, Inc.
- Barry Eichengreen and Jeffrey A. Frankel., 1996. "On the SDR: Reserve Currencies and the Future of the International Monetary System," Center for International and Development Economics Research (CIDER) Working Papers C96-068, University of California at Berkeley.
When requesting a correction, please mention this item's handle: RePEc:iie:wpaper:wp11-14. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peterson Institute webmaster)
If references are entirely missing, you can add them using this form.