IMF高級(jí)宏觀經(jīng)濟(jì)學(xué)研修班課程CTMMFLCurren

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; Metho

3、d of 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 trad

4、e and financial 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 exc

5、hange variability.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

6、 is widely used in 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.

7、By this standard, even Japanese yen is yet a fully fledged international currency.5International Reserves (% of Total)Source: IMF Annual Reports6Qualifications for International ReservesSize of GDPThe U.S dollar is dominantEuro quickly became the second key currencyStability of valueThe prospect of

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

9、 pound sterling has lost its key 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

10、Euro.Yen 0.2 1.0 0.1 1.3 29.4 2.4 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

11、 55.9 54,646.7 Other6.5 17.0 15.3 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

12、46.9 67.5 47.9 Euro2.0 9.3 4.663.0 55.2 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 Source: Bank of Korea, Kawai (2008), Kamps (2006), EURC10Determinants of Trade InvoicingTraded goods are more likely to be invoiced

13、by exporters currenciesExchange rate risk is 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 invoic

14、ed in a very few key currencies.11Objectives 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 curr

15、encies.Domestic borrowers (financial institutions 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 bankin

16、g sector.Yet with the development of financial derivative 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 (2

17、007) find that the shares are determined by the economic 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

18、insignificant. 143. Developing domestic financial institutionsDomestic 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 currenci

19、es, more opportunities in global financial intermediation open 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 in

20、ternationalize their currencies to hold a regional financial center 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

21、 center.In the case of the euro, a fully developed international financial 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 Si

22、ngapore dollars to non-residents or to residents where Singapore dollars 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 o

23、r global financial center countriesSpeeding up financial deepeningReducing 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 econ

24、omic fundamentals and foreign demandCI is not a necessary condition for 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 inv

25、olved with capital account liberalization and financial deregulationOne of 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 investo

26、rs are not subject to any restrictions in buying and selling domestic financial 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 Lib

27、eralizationGrowth BenefitsFinancial liberalization leads to flows of capital 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 i

28、nvestment in the latter. Kose et al. (2006) argue that there are certain threshold 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. Questio

29、n: Is the country suffering from a lack of domestic saving?21Effects of Capital Account 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, c

30、apital flows in many East Asian economies with fully and partially open capital accounts 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

31、 markets, their investments in an individual emerging economy often accounts for a very small 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 Accoun

32、t Liberalization International Reserve HoldingsIn theory, countries with internationalized currencies 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 internatio

33、nalized currencies e.g. U.K., Euro Area, Canada and Australia hold very small amounts of FOREX reserves, 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 econom

34、ic fundamentals (debt sustainability), not by its currency status.Example: Australia23Effects of Capital Account LiberalizationSummaryLittle robust empirical evidence on economic growthMany empirical studies show financial market instability caused by capital account liberalizationSmall country dile

35、mmaFree floating cannot fully deflect external shocks24II. Increase in exchange rate volatilitySince CI predisposes the emergence of offshore currency markets, emerging economies may have to endure an increase in the volatility of their exchange rates. The exchange rate would move responding to chan

36、ges in the foreign demand for the domestic currency resulting from foreign shocks not associated with domestic conditions of the economy.The opposite could be the case: by enlarging the foreign exchange market, CI can actually contribute to more stabilization of the exchange rate.Whether CI will lea

37、d to increased volatility of the exchange rate or not is therefore an empirical question. 25III. Increased vulnerability to currency crisisSome emerging economies may become more vulnerable to currency crises if foreign investors hold widely domestic-currency financial instruments.If foreign investo

38、rs are hit by a liquidity squeeze, they may be forced to sell domestic-currency assets, putting pressure on the exchange rate to depreciate. CI can result in providing speculators with more instruments to be used for speculative attacks on the currency. After the foreign investors intentionally rais

39、e funds by issuing financial debts or take a short position denominated in the domestic currency, they can sell the domestic currency in the foreign exchange market to drive the exchange rate down.26IV. Complications for monetary policy managementAn additional source of money demand by foreigners ma

40、y complicate the monetary authorities management of monetary policy. If the monetary authorities change money supply without taking into consideration external demand, they may not able to set the level of money supply that it intended to target in the domestic economy; German and Japan in 70s.Possi

41、ble counter-argument: monetary policys main operating target is the interest rate, not the money stock, if inflation targeting is the framework of monetary policy operation.Indeed, the difficulty of conducting autonomous or independent monetary policy is not due to CI per se, but more generally due

42、to capital account liberalization: the Impossible Trinity (Mundell 1963).27Costs of CI can be largeCosts involved with lifting restrictions on capital account transactions together with deregulation of the domestic financial system.Increase in volatility of exchange rateIncrease in financial vulnera

43、bilityComplications in management of monetary policy When the benefits are balanced against costs of internationalization, strong case for CI in emerging economies cannot be made.28Evolution of an International Currency29MMFEvolution of an International CurrencyHow to transform an insular currency i

44、nto an international medium of exchange?De facto process : the Australian dollarDe jure process : the Japanese yenWhy has Japan failed to elevate the yen to reserve currency status?Why has the euro been accepted as a reserve currency from the beginning?Has the British pound eclipsed as a key currenc

45、y?30Experience of Japanese YenDespite strong initiatives from the Japanese government, the international status of yen had changed very little in the past two decades.Even within East Asia, Japanese Yen has not been able to become the dominant currency in trade settlement. U.S. dollar is much more w

46、idely used, even in Japanese trade with East Asia than is the yen. East Asia remains a very strong dollar zone.For instance, In 2002, 80.6% of Korean imports and 86.3% of exports were invoiced in U.S. dollar, and only 12-13% of imports and 5.2% of exports were invoiced in Yen, although Japan is at l

47、east as important a trading partner as the US. Why?31Experience of Japanese YenThe choice of invoice currency was determined by various factors, including market power, matching of product exports and material imports, international price setting practice, preferences of importers and exporters, etc

48、. In particular, a) raw materials constitute a large share of Japans imports; b) the currencies of Asia tended to fluctuate more with the yen than with the USD; c) there is little need for yen loans because most trade is not denominated in yen. Determinants of currency choice in financial transactio

49、ns: the level of interest rates, market expectations about prospective exchange rate movements, etc.Currency choice of reserve holdings: the most important factor seems to be exchange rate management practice. 32Evolution of an International CurrencyHow to transform an insular currency into an inter

50、national medium of exchange?De facto process : the Australian dollarDe jure process : the Japanese yenWhy has Japan failed to elevate the yen to reserve currency status?Why has the euro been accepted as a reserve currency from the beginning?Has the British pound eclipsed as a key currency?33CI and F

51、inancial and Monetary Cooperation and Integration in East AsiaFinancial market integrationLiberalization of cross border investment will promote integration of East Asias domestic financial markets with one another and with global financial marketsEqually important for the integration are constructi

52、ng regional financial infrastructure including a settlement system, and harmonizing market practices and withholding taxesCompetition for hosting a financial centerCI is not a necessary conditionIt is a market-driven rather than a government-oriented process.Countries with internationalized currenci

53、es have a competitive edge34CI and Financial and Monetary Cooperation and Integration in East AsiaCI and monetary integration privileges of reserve currency countriesExcept for the yen, currencies of other Asian countries are poor substitutes for the US dollar and euro in creating global liquidityEv

54、en the yen has a limited capacity of complementing the US dollar in supplying global liquidityUnlike those in the US and Euro area, Asian institutions are exposed to insolvency risks when global liquidity vanishesAsian countries could join either a US dollar or euro bloc (Unrealistic option)Alternat

55、ively they could construct a monetary union among themselves. According to Shirono(2009), the RMB could play the role of an anchor currency in such a union.35SummaryIt is important to articulate the objective of CIIt is important to determine the readiness, efficiency of the institutions required, a

56、nd order of capital account liberalization before embarking on CIA de jure process may require a big bang style capital account liberalizationA de facto process may be consistent with a gradual approachCreating offshore markets where non-residents can issue and trade financial instruments denominate

57、d in the domestic currency is the last stage of CI.36RMB Internationalization37MMFMotivationsLong-run goal: for RMB to ultimately attain an international status that is commensurate with Chinas economic weight and trade scale.Background:High current account surpluses and rising capital inflows have

58、contributed to the rapid accumulation of reserve assets, primarily denominated in the U.S. dollar.Substantial increases in intra-emerging markets trade and capital flows, for instance, within the Asian region.Chinese capital “going out”: increased needs for outward direct and portfolio investment by

59、 Chinese firms and individuals.Chinese economy and RMB became more attractive amidst the most recent financial crisis in the U.S. and Europe.38Monetary ConsiderationsRMB internationalization may also help overcome the socalled “conflicted virtue” problem (the inability of a creditor country to lend

60、in its own currency):If international trade in particular exports can be invoiced in RMB, then CA surpluses will not lead to accumulation of dollar-denominated assets on the PBCs balance sheet.Capital outflows can also help alleviate domestic liquidity pressure ; if outflows can be denominated in RM