Research On Currency Competitiveness From The Perspective Of Money Demand

Money is an old but a popular topic, the process of competition between different currencies and their results are in the formation of the international monetary order or even system. Along with the overall strength of commodity economy society and trade development and expansion between countries, the currency gradually evolved from the in-kind currency during the barter period into precious metals and credit currency under the system of bank notes; because of the extensive application of electronic technology, electronic money and fictitious money have come into being. As the medium of exchange, the quantity of currency is from a small amount into large numbers in circulation, and its function has gradually strengthened. In addition to reducing transaction costs, the function of money extends to measurement and storage of value in order to facilitate trade. This trend exists not only within the territory of a country, but, with the expansion of the scope of trade, the basic functions of currency break the national boundaries and national currency appears circulating cross borders in a small amount, and has international purchasing power with its scale step by step as well. A few of them stand out in the process, their radiation force unprecedentedly enhances, and some other countries even make a replacement of their own currencies with the more influential and competitive currency. Thus some of the currency upgrades from sovereign to international currency and the international monetary group becomes diversified from a single. As a result, the international monetary system has gone through different stages of changes, which are full of conflicts between various sovereign states and coordination, as well as competition and cooperation. The competition between sovereign currencies becomes the focus of academic debate.Hayek put forward the idea of non-state money to break the government monopoly on the currency. Friedrich August Von Hayek(1976,1978), Roland Vaubel(1986), Lawrence H. White, (1984,1989), George Selgin(1988) and some other economists have doubted the government monopoly on the currency, suggesting that currency provided by a competitive supplier must have its own unique characteristics, and currency users would like their currency holdings to be widely accepted and its price stable. In addition, foreign scholars also discuss the costs and benefits of enhancing the currency's competitiveness, and elaborate on the impact of factors of currency competition.Since the 21st century, economic globalization has become more and more strengthened:a faster development and deeper cooperation in the real economy and the fictitious economy have been carried out between countries; an international coordination mechanism has been established in the markets of production, trade and finance; sovereign currency competition has been heating up quietly and the shift in the territorial sphere of currency has become a hot topic. A country's monetary authorities looks like having a monopoly or leading rights on its currency, but with the relaxation of exchange control, the freedom of capital input and output has become increasingly frequent, which makes countries face the problem to completely control over the direction and speed of its economic development, and the connotation and extension of currency competition has also been given a new definition. Currency competition between private individuals and between private individuals and government has gradually been replaced by competition between the various sovereign currencies.After the U.S. subprime loan crisis, governments adopted different economic policies in order to achieve several goals, such as to encourage exports, to guard against financial risks, and to reduce reserve losses. Especially the implementation of quantitative easing policy (mainly lowering interest rates, increasing treasury bonds, etc.) directly affected the stability of money price, and the sphere of sovereign currency, especially the leading international currency, has been greatly adjusted in this round of crisis.The international currencies such as U.S. dollar, Euro, British pound, Japanese yen become a focus of debate. A new interpretation has been made on account of the impact from implementing quantitative easing policy or its possibility. Moreover, enhancing the competitiveness of Renminbi, upgrading the regionalization and the possibility of speeding up it internationalization have also attracted international monetary authorities' attention.From the perspective of the demand for money and historical evolution of the international monetary system, this study, based on the theory of international competitiveness of Renminbi and historical examples of sovereign currency competition, proposes some effective theoretical references for China's monetary authorities to raise the RMB influence, which may help our government implement appropriate policy to ensure the a smooth process of RMB's regionalization internationalizationally and RMB's supportive role in the economic development of the entire financial system, and to promote China's international political and economic empowerment. Along the historical development, this article emphasizes both theoretical and historical experiences, uses the methodology of economics and econometrics to carry out the normative analysis, theoretical modeling and empirical testing.This paper defines the scope of the study firstly. The formation of currency competitiveness is the result of various factors such as political, military, economic, financial, geographical and historical events. From a broad perspective, competitiveness is the performance for changes in preferences of money demand, and the radiation of currency sphere motivated by the money demand. Since the political, military, historical events and other factors are difficult to quantify, this paper can only be limited to the level of economic and financial discussion. With a narrow perspective of competitiveness as the research premise, competitiveness is currency's capacity for cross-border settlement, trading and storage beyond a country's territory. This research analyzes the driving force of competitiveness based on the theory of money demand. The chosen between different currencies is the rational choice for micro-economic agents to reduce transaction costs and improve income for holding money.This paper analyzes the reasons for the formation of different levels of currency competitiveness. First of all, it discusses the competition between international currency and non-international on behalf of dollarization in Latin American countries. It reviews the formation of dollarization in Latin America to identify main driving force in the process of dollarization - inflation, but this is just the basic feature of early dollarization. Second, as the representative of the competition between single international currency the U.S. dollar replaced sterling. Pound sterling rised in gold standard period, it was widely used by other countries as a trading currency, denominating currency and reserve currency; thus forming a kind of scale and network effects, and then the pound was in a natural monopoly. However, the British Empire lost its economic hegemony, some colonial superiority, military and other international leading positions led to the decline of the pound inevitably. With the backing of the U.S. economic strength, trade volume, the stability of the U.S. dollar, and the completeness of central banking system, US dollars expanded its trading network in the period of the gold standard and gold exchange standard, and strengthened its sphere of influence as the leading international currency after World War II with the reform of the monetary system and benefit of financial market liquidity. However, the dollar hegemony, in the competition between a single international currency and regional currency, has been shaken by the enhancing competitiveness of the euro. The U.S. dollar standard led to the external imbalances of current global economy, so the center (United States) and the peripheral countries are to strengthen international coordination and cooperation. Therefore, the currency competition and levels will change within the international monetary system. Since the birth of the euro, this trend has been strengthened, although it cannot shake the U.S. dollar as leading international currency status. However, a large-scale improvement of central banks diversifying reserve currencies began since the depreciation of dollar against euro between 2002 and 2004. Several factors are the external driving forces of depreciation and the decline of international market share of the dollar, such as the enhancing power of the European Monetary Union, the successful completion of monetary reform among euro-zone countries, and the euro has become the new reserve and settlement currency.Based on the description of evolution of competitiveness for territory currency, regional currency, and the international currency, this paper, using econometric methods, makes out composition of economic indicators to measure the competitiveness of the reserve currency:a country's output (the ratio of a country's GDP share), trade patterns (the changing of exchang'e rate in trade-weighted), development of financial markets (stock market capitalization, bond market capitalization, market liquidity), the confidence of money (currency depreciation rate, inflation rate), and network externalities (the ratio of reserve currency in total global trade volume).RMB is a special case. Since the capital account is still closed, it must be bias when using reserve currency model to discuss the competitiveness of RMB, but it can provide reference for enhancing the competitiveness of RMB. We should measure the competitiveness of RMB from the demand deriving from external economies and emphysize the indicators of domestic production, international trade, the RMB confidence, trading network etc. The last part of the article, based on the description of the status of Renminbi competitiveness, compares the yuan with currencies of its neighboring countries (regions), the competition and cooperation between the yuan and the yen in particular. The yen was superior to RMB in several aspects, such as the development of financial markets, widespread acceptance and use of inertia; RMB exceeds after 2005 in the aspects of the import and export volume, international liquidity, the confidence, the RMB exchange rate ratios, etc. More and more neighboring countries and regions accept RMB as a denominated currency and a medium of exchange. The launch of Renminbi bonds reflects the investment motivation of residents and businesses, which further expands the yuan's sphere of influence. The competitiveness of RMB will be raised from regional to international according to "demand-led plus arrangements" mode.