| US dollar acts as the only key currency for international settlements in global monetary system for a long time,and its powerful payment network improves financial efficiency in multilateral trade.However,asymmetry in global currency exchange leads to systematic risks and latent defect.Taking advantage of US dollar's international prestige,United States is able to reduce the risk of currency mismatch,increase global financing capability,and even transfer domestic financial crises' harm upon other countries.Therefore,there' re increasing voices for multi-polarized global monetary system in international society.Renminbi internalization started in 2009.Nowadays,Renminbi has become 5th largest global payment currency,constantly expanding its usage in Chinese outward foreign direct investment,foreign direct investment,global securities market transactions and other more fields,and acting as global reserve currency by its inclusion in IMF's Special Drawing Rights in October 2016.However,RMB's total share in global payment usage is still limited.Global monetary system's "Core&Periphery"structure,that is,US Dollar as core currency while RMB and others as peripheral currencies,won't change in a short period.Along its way to expand Renminbi's own payment network,risks emerge significantly.There is not only further trade friction expected,but also massive cross-border capital flows,increased volatility in foreign exchange market and other risks showed in recent years.Currency substitution means that one currency directly or indirectly replaces another one in terms of one or more money functions,that is,measurement of value,method of payment,medium of exchange and store of value,and economic variables from other country affects domestic money demand function.For country which already has a fiat currency for daily use,foreign currency wouldn't perfectly substitute domestic one,instead there will be transaction costs in both macroscopic and microscopic perspectives.This paper tries to incorporate transaction costs viewpoint into classic currency substitution theory,firstly enumerate possible macroscopic and microscope transaction costs in currency substitution process,showing that if a country would like to bear more microscopic transaction cost and export monetary institution aboard,then microscopic transaction cost will be lower when other country's clients using this currency.Then I use economic model to analyze the role transaction costs play when currency substitution occurs and develops,finding out that the lower microscopic transaction costs are,the more easily currency substitution will happen,and currency substitution shows ratchet effect due to the existence of transaction costs.In addition,statistical analysis is used to demonstrate currency substitution and ratchet effect degree of Renminbi and US dollar in Hong Kong.The main conclusions of this paper are as bellows.Firstly,transaction cost of currency substitution can be divided into macro transaction cost and micro transaction cost,both have effects on the process of currency substitution.Secondly,private sectors decide which currency to use depending on domestic currency's increase rate and foreign currency's micro transaction cost.The lower micro transaction cost is,the more possible currency substitution happens.Thirdly,by giving compensation to countries whose currency being substituted,and bearing corresponding macro transaction costs,later starter can still manage to make currency substitution process happen.Fourthly,currency substitution has ratchet effect because of the existence of transaction cost.Based on empirical analysis,RMB payment network has shown ratchet effect in Hong Kong area,and method of payment is the main currency function RMB provided.Fifthly,private sectors enjoying the advantages of lowered micro transaction costs while government bearing macro transaction costs,is the feature of RMB internalization in current stage. |
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