IMF高级宏观经济学研修班课程CT1405MMF-L07Curren.pptx

1、Currency InternationalizationPresenterTao WuCTP Training ProgramMacroeconomic Management and Financial Sector IssuesCT14.05Content OutlineDefinition of currency internationalizationObjectives and benefits of currency internationalizationCosts of currency internationalizationEvolution of an internati

2、onal currencyRMB Internationalization2Definition of Currency Internationalization3MMFDefinition of International CurrencyA national currency is regarded“internationalized”if it plays the role of money outside the country where it is issued.Medium of exchange;Unit of account;Store of value;Method of

3、payment.For an operational definition,it may be useful to identify qualifications for an international currency.Capital account convertibility;no restrictions on currency trading,spot or forward;Little or no restrictions on foreigners access to domestic financial markets;Large volume of trade and fi

4、nancial assets from the originating country;The issuer has the bargaining power to denominate trade in its currency;Well developed financial market with a large variety of risk-hedging instruments;breadth and liquidity;Stability of value:long-run price stability(low inflation)and low exchange variab

5、ility.4Capital Account ConvertibilityCapital account convertibility may be a precondition,but it does not automatically lead to currency internationalization(CI).IMF defines the term“convertible”as“freely usable for the settlements of international transactions”.Unless the currency is widely used in

6、 international transactions,it does not function as a global unit of exchange.The degree of a currencys actual usage is the most critical criterion:Its share in the denomination of international trade and financial assets;Foreign holdings of the currency as international reserves.By this standard,ev

7、en Japanese yen is yet a fully fledged international currency.5International Reserves(%of Total)6Source:IMF Annual ReportsQualifications for International ReservesSize of GDPThe U.S dollar is dominantEuro quickly became the second key currencyStability of valueThe prospect of the economyEuro vs.YenF

8、inancial developmentMay not be so criticalEuro vs.British pound7Financial Asset Denomination(Money Market,%of Total)8Source:BIS Quarterly Review:various issues.Financial Asset DenominationThe US dollar has lost its dominance.The euro has become the dominant currency.The pound sterling has lost its k

9、ey currency position despite London being a global financial center.9Trade DenominationUnited StatesUnited KingdomJapanGermanyFranceAustraliaExportImportExportImportExportImportExportImportExportImportExportImport1980US$96.0 85.0 17.0 29.0 65.7 93.0 7.2 32.3 20.3 37.1 Euro.Yen 0.2 1.0 0.1 1.3 29.4 2

10、.4 0.0 0.0 0.1 0.7 Home96.0 85.0 76.0 38.0 29.4 2.4 82.5 43.0 60.5 37.1 Other3.8 14.0 6.9 31.7 4.9 4.6 10.3 24.7 19.1 25.1 1992US$92.0 80.0 22.0 22.0 46.6 74.5 7.3 18.4 16.5 23.1 Euro.Yen 1.5 3.0 0.7 2.4 40.1 17.0 0.3 1.7 0.8 1.3 Home92.0 80.0 62.0 43.0 40.1 17.0 77.0 55.9 54,646.7 Other6.5 17.0 15.

11、3 32.6 13.3 8.5 15.4 24.0 28.1 28.9 2000US$29.0 34.0 52.4 70.7 42.6 57.2 68.0 51.4 Euro21.0 19.0 6.1 1.2 44.6 32.9 0.3 2.3 Yen.36.1 23.5.0.8 5.2 Home46.0 42.0 36.1 23.5 44.6 32.9 28.6 28.3 Other4.0 5.0 5.4 4.6 12.8 9.9 2.3 12.8 2003US$90.3 48.0 68.324.1 33.9 33.6 46.9 67.5 47.9 Euro2.0 9.3 4.663.0 5

12、5.2 52.7 45.3 1.4 9.4 Yen.38.9 25.0.9 3.6 Home90.3 38.9 2563.0 55.2 52.7 45.3 27.8 32.6 Other7.7 3.8 2.112.9 10.9 13.7 7.8 2.4 6.5 10Source:Bank of Korea,Kawai(2008),Kamps(2006),EURCDeterminants of Trade InvoicingTraded goods are more likely to be invoiced by exporters currenciesExchange rate risk i

13、s more critical for exporters.Producer currency pricing is more likely if traded goods are more differentiated.Demand uncertainty is lower for more differentiated goods.More homogeneous goods such as oil and other primary commodities are likely to be invoiced in a very few key currencies.11Objective

14、s and Benefits of Currency Internationalization12MMF1.Reducing foreign exchange rate risksDomestic agents engaged in foreign trade may be able to reduce foreign exchange rate risks to the extent that their exports and imports are invoiced in their own currencies.Domestic borrowers(financial institut

15、ions and firms)could also borrow in their own currencies,thereby avoiding currency mismatch in their balance sheets.The 1997 Asian financial crisis demonstrated that macroeconomic shocks could be amplified by the balance sheet aggravation in the banking sector.Yet with the development of financial d

16、erivative products,such benefits become lower.132.Collecting seigniorage revenuesCountries having major international currencies also reap the benefits of collecting seigniorage revenues from foreign holdings of their currencies.Chinn and Frankel(2007)find that the shares are determined by the econo

17、mic size of the country,inflation rate,exchange rate variability,and the size of the relevant financial center.As far as emerging economies are concerned,since they are well behind in terms of these determinants,this benefit is likely to be insignificant.143.Developing domestic financial institution

18、sDomestic financial institutions may gain an edge over their external competitions in dealing in their own currency.Once a number of financial assets denominated in their own currencies are issued and freely exchanged for foreign currencies,more opportunities in global financial intermediation open

19、up for domestic financial institutions.Some policy makers consider currency utilization as a way to develop the financial institutions.154.Establishing an international financial centerSome emerging economies may find it necessary to internationalize their currencies to hold a regional financial cen

20、ter somewhere on their soil.For example,Korea has been pursuing internationalization of its currency in the expectation of hosting an international financial hub.However,CI does not necessarily lead to the establishment of a financial center.In the case of the euro,a fully developed international fi

21、nancial center is located in London.Singapores non-internationalization policy also illustrates that CI is not a necessary condition for the development of a financial center.Restrictions of cross-border asset-side bank lending of Singapore dollars to non-residents or to residents where Singapore do

22、llars were to be used outside Singapore,until the late 1990s.16Summary of Objectives/BenefitsLaying the foundation for a reserve currencyAvoiding“original sin”Improving competitiveness of exports of financial services as regional or global financial center countriesSpeeding up financial deepeningRed

23、ucing foreign exchange rate risksSeigniorage revenuesHolding smaller amounts of reserves17Benefits may not be large for emerging economiesDemand for international currency is market drivenCurrency denomination is determined by economic fundamentals and foreign demandCI is not a necessary condition f

24、or a regional financial center.Examples:Euro and Singapore dollar.Smaller reserve holdings are not necessarily related to CIAustralia has contracted a swap with the US Fed18Costs of Currency Internationalization19MMFI.Costs involved with capital account liberalization and financial deregulationOne o

25、f the necessary conditions for CI is liberalization of capital account transactions.Deregulation of cross border investments would provide a level playing field for both foreign and domestic market participants.Foreign investors are not subject to any restrictions in buying and selling domestic fina

26、ncial instruments in both domestic and offshore marketsLikewise,domestic residents are accorded the same opportunities to participate in foreign financial markets both as lenders and borrowers.20Effects of Capital Account LiberalizationGrowth BenefitsFinancial liberalization leads to flows of capita

27、l from(advanced)economies with low rates of return on capital to(emerging and developing)economies with higher returns,thereby complementing limited domestic savings and lowering the cost of capital to augment domestic investment in the latter.Kose et al.(2006)argue that there are certain threshold

28、conditions emerging economies are to meet in order to reap growth benefits from financial market opening such as developed financial markets,high quality of institutions and governance,and trade integration.Question:Is the country suffering from a lack of domestic saving?21Effects of Capital Account

29、 LiberalizationFinancial StabilityIncreasing capital account liberalization has increased the volatility of capital flows,posing serious impediments to financial stability.Since the eruption of the 2008 crisis,capital flows in many East Asian economies with fully and partially open capital accounts

30、have become more unstable than before,causing a high degree of fluctuations of stock prices and exchange rates.To large foreign private and institutional investors operating out of East Asias regional financial markets,their investments in an individual emerging economy often accounts for a very sma

31、ll share of their total global investments,yet possibly a large part of the local markets and can therefore easily dictate movements of financial prices including the exchange rate.22Effects of Capital Account Liberalization International Reserve HoldingsIn theory,countries with internationalized cu

32、rrencies and free floating would not need to hold as much reserves as countries with insular currencies,because they can use their own currencies to substitute for dollar liquidity.Countries with internationalized currencies e.g.U.K.,Euro Area,Canada and Australia hold very small amounts of FOREX re

33、serves,borrowing externally to finance their current account deficits,although there are exceptions such as Japan.But a countrys capacity for external financing is likely to be determined by its economic fundamentals(debt sustainability),not by its currency status.Example:Australia23Effects of Capital Account LiberalizationSummaryLittle robust empirical evidence on economic growthMany empirical st