Trade Finance and International Currency: A Monetary Search Approach (Job Market Paper)
Abstract: This paper studies the determinants of currency choice in trade. Previous literature focused on economy size and openness, but that couldn't explain why RMB remains largely national, while China is already leading in international trade. This paper highlights the importance of financial development for currency internationalization. First I use SWIFT dataset to empirically verify the significance of financial development. Then I build a two-country monetary search model in which trade takes time, and the lack of commitment makes exporter and importer rely on bank-intermediated finance. The agent's currency choice is related with terms of trade, monetary policy, and financial efficiency. Optimal monetary policy differs according to currency regime. Related topics such as size effect and global imbalance are also discussed.
Currency Choice in International Trade: A New Monetarist Approach and Firm-level Investigation (with Dong Lu and Ruifeng Zhang, IMF working paper, forthcoming)
Financial market imperfections severely restrict currency use in international trade. We develop a unified framework with financial frictions to address the determinants of currency choice, emphasizing the roles of financial market development, as well as monetary policy and firm's bargaining power. In an open economy monetary search model, the usage of a particular currency will emerge endogenously and strategic complementarities among exporter, importer and investor reinforce the status of international currency. With highly disaggregated data from Colombia exporters, we provide firm-level evidence that financial factors significantly affect the patterns of currency usage. We show that exporters tend to use the currency with a more developed and efficient financial market, especially for small firms in financially vulnerable sectors. In particular, a median developing country could enhance its home currency usage by 8% through financial market development. Furthermore, bad monetary policy and low bargaining power of exporters will severely restrict the popularity of a currency. These results have important policy implication for RMB internationalization.
The Road to International Currency: Global Perspective and Chinese Experience (with Xiaosong Wang)
Abstract: This paper studies the international currency use in financial transaction from 2011 to 2013. A currency becomes international when used outside of its issuing country, and advances to international vehicle currency if used among nonresidents. We estimate a gravity model to explain the geographical distribution of international currency use. For major currencies, higher level of integration and stable macroeconomic environment increase their international use. Specifically, trade and portfolio investment are more helpful in raising the direct use, while FDI has stronger effect in promoting the vehicle use. For RMB, trade improves the intensity of its global use, and FDI increases the number of its user. The policy effect on RMB internationalization is significant only for direct use. Additionally, major currencies experience death of distance, whereas RMB use is decreasing in geographical distance, implying its role to be more regional during this period. We recommend outward FDI by private Chinese firms to increase the vehicle use of RMB and make it truly international.
Work in progress
The onshore-offshore interaction of RMB market: a high-frequency analysis
Central bank intervention in an order flow model