Working Paper: CEPR ID: DP17781
Authors: Christopher Clayton; Amanda dos Santos; Matteo Maggiori; Jesse Schreger
Abstract: We empirically characterize how China is internationalizing the Renminbi by staggering the entry of different types of foreign investors into its domestic bond market and propose a dynamic reputation model to explain this strategy. Our framework rationalize China’s strategy as trying to build credibility as an international currency issuer while reducing the cost of capital flight. We provide a sufficient statistic to measure countries' reputation over time and show that it can be estimated using micro data on foreign investors' portfolios. We use our framework to explore how countries compete to become a reserve currency provider.
Keywords: Capital Controls; Reputation; Safe Assets; Renminbi; Exorbitant Privilege; International Currency
JEL Codes: E01; E44; F21; F23; F32; F34; G11; G15; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| China's strategy of staggering the entry of different types of foreign investors into its domestic bond market (G15) | building its reputation as an international currency issuer (F33) |
| allowing stable long-term investors to enter first (G24) | establish a solid investor base (G24) |
| establish a solid investor base (G24) | enhance China's credibility (F55) |
| as reputation builds (Z13) | gradually allow more flighty investors to enter the market (G18) |
| early investment by stable investors (G24) | provide a buffer against potential crises (H12) |
| the government's reputation (H11) | perceived as the probability that it will not impose capital controls (F38) |
| the reputation-building process (O36) | inherently slow and fraught with challenges (O33) |