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The Renminbi Bloc is Here: Asia Down, Rest of the World to Go?

  • Arvind Subramanian

    ()

    (Peterson Institute for International Economics)

  • Martin Kessler

    ()

    (Peterson Institute for International Economics)

A country’s rise to economic dominance tends to be accompanied by its currency becoming a reference point, with other currencies tracking it implicitly or explicitly. For a sample comprising emerging-market economies, we show that in the last three years, the renminbi (RMB) has increasingly become a reference currency, which we define as one that exhibits a high degree of co-movement with other currencies. In East Asia, there is already a RMB bloc, because the RMB has become the dominant reference currency, eclipsing the US dollar, which is a historic development. In this region, 7 currencies out of 10 co-move more closely with the RMB than with the dollar, with the average value of the co-movement coefficient relative to the RMB being about 60 percent greater than that for the dollar. We find that co-movements with a reference currency, especially for the RMB, are associated with trade integration. We draw some lessons for the prospects for the RMB bloc to move beyond Asia based on a comparison of the RMB’s situation today and that of the Japanese yen in the early 1990s. If trade were the sole driver, a more global RMB bloc could emerge by the mid-2030s, but complementary reforms of the financial and external sectors could considerably expedite the process.

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Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP12-19.

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Date of creation: Oct 2012
Date of revision: 2013
Handle: RePEc:iie:wpaper:wp12-19
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