The geographic distribution of international currencies and RMB internationalization

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Title: The geographic distribution of international currencies and RMB internationalization
Author: He, Qing ; Korhonen, Iikka ; Guo, Junjie ; Liu, Fangge
Organization: Bank of Finland
Department / Unit: Institute for Economies in Transition (BOFIT)
Series: BOFIT Discussion Papers
Series number: 20/2015
Year of publication: 2015
Publication date: 3.6.2015
Published in: Published in International Review of Economics & Finance, Volume 42, March 2016, Pages 442–458
Pages: 33
Subject (yso): valuutta; valuuttamarkkinat; liiketoiminta; ulkomaankauppa; pääomanliikkeet
Keywords: Bofit-kokoelma; Kiina; China
JEL: F33; F36; G15
Other keywords: currency internationalization; distribution of currencies; gravity model
Abstract: The paper investigates the determinants of geographical distribution of international currencies in global financial market transactions. We implement a gravity model, in which international currency distribution depends on the characteristics of the source and destination countries. We find that the source country’s currency is more likely to be used in the financial market transactions of the destination country if the bilateral trade and capital flows are large or the destination country’s economy is the larger of the two. We also find that the level of development of the destination country’s financial market and whether the two countries use a common language are important determinants of the currency distribution. In addition, our model suggests that, to be a true international currency, the renminbi should be used more extensively in the financial markets of the US and UK.

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