An Empirical Research On The Factors Affecting Currency Internationalization

Since the establishment of the Jamaica system, the US dollar still maintained its dominant status inthe International monetary system based on its large size of real sector and its highly developedfinancial markets. As a credit currency, the US dollar’s attractiveness to the market depended on manydomestic and international factors, but this “Dollar Standard System” had also caused some negativeeffects, and there occurred more financial crises gobally. Especially the Asian financial crisis in1997and the recent global financial crisis had made serious shocks on the related economies. And one of themain causes of these negative effects is that the Federal Reserves in the US always made their dicisionsbased exeptly on the US interests, and ignored the other countries’ interests, this made other countriessuffered from the passive status in the international monetary system. Just because of this, thereemerged questions about the status of the US dollar, more and more people began to think about thefuture of the hegemony of the US dollar, and the possibility of a new international monetary system.But the reality of the world economy means that the shaking of the dominant status of the US dollarwould take a very long time. So, the other countries began to find other ways to reduce the negativeeffects of the current Dollar Standard, and among which the improvement of local currencyinternationalization is a important way.Currently, the Euro is still a main international currency after the US dollar, and the Euro Area hasmade constant efforts to promote the international use of the Euro. But after the European sovereigndebt crisis, the future of the economic growth of the Euro Area is not very positive, and the crisiscaused the weakness of the Euro, and increased the uncertainty of the future of the Euro. And the weakperformance of the Japanese economy also made people to take a dim view of the future of theJapanese Yen in the international monetary system.No doubt, the current economic situation in the developed countries provided a new opportunityfor the rise of the international status of the RMB, and made Chinese government to take the initiave topromote the internationalization of the RMB. Faced with the uncertainties of the current situation of the world economy, China must improve the capability to deal with the risks, and to diminishing the effectsof the flucuationes in other economies on domestic market,especially the domestic financial market, topromote the internationalization of the RMB is a necessary choice in the long run. If the RMB isinternationalized, then we can use it in the settlement of international trade to reduce the exchange raterisks, and can reduce the potential risks of holding large size of the US dollar denominated reserves.But to improve the process of the RMB internationalization successfully and effectively, we need tofind the important pre-conditions for the currency internationalization, to find the regular patterns of thecurrency internationalization, so we can get some useful implications for the RMB internationalization.In this work, we need to answer3key questions: the first, which are the main affecting factors ofcurrency internationalization, the how these factors works; the second, for current internationalcurrencies, is there a spillover effect in its internationalization process, and if there is, what’s the resultof this effect on the currency’s international status; and the third, how this spillover effect developed,and whether it will play a long term role. To answer these questions, this thesis made sufficienttheoretical and empirical studies on the factors affecting currency internationalization and the spillovereffects.Firstly, the thesis made a systemic discussion about the the onceptions and theories related withcurrency internationalization: based on the introduction of the conception, the functions and the natureof currency, the thesis made a discussion on the conception, the nature and the characters of theinternational currency, and difined the conception of currency internationalization, thus made thebackground for following research. Then the thesis made a comprehensive theoretical discussion andanalysis on the factors affecting currency internationalization, provided a set of cretirias for thefollowing empirical studies, and it also helped the following comparative analysis. Then, the thesissummarized the historical experiences of the internationalization processes of the main currencies, alsoto provide a background for the following discussions and to draw some lessons for the current effortsof RMB internationalizaition.Based on the theoretical discussion described above, the thesis performed a series of empiricalstudies to determine the factors affecting the internationalization of the US dollar, the Japanese Yen andthe Euro. First, determinants and spatial spillover effect affecting the geographical distribution of USDwere empirically examined. In this part, the thesis analyzed the changing status of the US dollar acting as an international currency in different historical periods, and then we performed a static panel model,a dynamic panel model and a spatial panel data model to analyze the determinants and net externalityaffecting the US dollar’s leadership in currency market. The results showed that countries’ level ofdevelopment of foreign exchange market and their actual trade volume with USA are the factorspositively affecting the international distribution of the US dollar，and we found that countries sharinghigher bilateral exchange rate volatility with the US dollar would hold more USD. In addition, foreignexchange market trading volume in the last period also is a powerful driver of the US dollar leadership.It means that the larger foreign exchange market trading volume in the last period, the more possibilityUSD can be accepted in a given market. The evidence thus leads to conclusion that net externality actas an important determinant of USD’s internationalization. We also found the actual trade volume ofneighboring countries with USA also positively affect the using of the US dollar in a given market.These findings indicated that there would be a spatial spillover effect affecting the geographicaldistribution of USD and this effect may be achieved through international trade. Secondly, weempirically analyzed the direct influencing factors and net externality of the Japanese Yeninternationalization. Following the introduction for the status of Yen internationalization, weconstructed a series of panel data models to analyze the determinants and net externality affecting Yeninternationalization. The results told us, bilateral exchange rate volatility, development of foreignexchange market and the actual trade volume with Japan are positive factors influencing Yeninternationalization. Foreign exchange market trading volume in the last period also is a powerfuldriver of Yen internationalization. It means that the larger foreign exchange market trading volume inthe last period, the more possibility Yen can be accepted in a given market, indicating net externalityacts as an important determinant of Yen internationalization. In addition, we found countries with moredeveloped foreign exchange market raised the possibility of Yen acception in its neighboring countries,suggesting there would be a spatial spillover effect affecting Yen internationalization. Determinants andnet externality of Euro internationalization were also empirically analyzed. Based on the introductionof theories on currency internationalization and regionalization, we discussed the international status ofEuro, which is the major regional currency in the world. And then we empirically analyzed the internalfactors influencing Euro internationalization based on a set of time-series data. The results showed thatEuro zone’s fiscal deficit volatility largely reduced the internationalization of Euro. And we found larger trading volume among countries of Euro zone in the last period would increase the degree ofEuro internationalization. A series of panel data models were further constructed to analyze the factorsaffecting the degree of Euro internationalization. We found that countries sharing higher bilateralexchange rate volatility with Euro had higher possibility of holding Euro and, development of foreignexchange market and the actual trade volume with Euro zone are positive factors influencing Eurointernationalization. Foreign exchange market trading volume in the last period also is a powerfuldriver of Euro internationalization. Additionally, we found there would be a spatial spillover effectaffecting Euro internationalization and this effect was achieved through international trade.In this thesis, factors affecting RMB internationalization (or regionalization) were also empiricallyanalyzed. Based on the introduction of the status of RMB regionalization, we performed a binarydiscrete choice model to analyze the determinants of RMB’s internationalization in the Asian market.The result told us that trading volume with China, debt burden, GDP per capita and distance areimportant determinants of RMB circulation in a given country. Larger trading volume with China anddebt burden can increase the possibility of RMB circulation in a given country. In contrast, RMB caneasily be accepted in a country with lower GDP per capita and short distance with China.In the last part of this thesis, the author tried to put multiple currencies to a same economic systemto analyze the determinants and net externality of currency internationalization. As the first step, anunbalanced panel model was constructed based on a multiple-currencies data set to analyze the factorsinfluencing the reserve function of international currencies. The result showed that amount ofinternational trade transactions and bond trading volumes are important factors influencing the reservefunction of international currencies. Furthermore, we empirically analyzed the factors influencing theexchange function of international currencies based on a three-dimensional matrix for currencyexchanging. We found that bilateral trade share would play important role in the process of currencyinternalization. With other conditions remaining unchanged, countries sharing more trading volumewith the currency country would prefer to use this currency.