Working Paper: NBER ID: w18771
Authors: Alan M. Taylor
Abstract: This paper analyzes the consequences of the internationalization of the Chinese renminbi for the global monetary system and its possible ascension to reserve currency status. In an unstable and financially integrated world, governments' precautionary demand for reserve assets is likely to increase. But the world then risks a third crisis of the global reserve system, another re-run of the Triffin paradox, with an ever-growing emerging-world insurance demand loaded onto a small group of ever more strained net debt suppliers. Two ways to avoid this outcome would entail either expanding the supply of credible reserve liquidity to include some large emerging-market providers, or finding ways to manage emerging-market risks so as to moderate the perceived need for insurance, and China would have to loom large in both solutions.
Keywords: No keywords provided
JEL Codes: F01; F02; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Internationalization of the renminbi (F30) | Diversification of reserve assets (F31) |
| Diversification of reserve assets (F31) | Larger buffers against financial shocks (F65) |
| Emerging markets accumulate reserves (F31) | Demand for renminbi as a credible alternative (F31) |
| China becomes a significant supplier of reserves (Q37) | Alleviation of pressure on existing reserve currency issuers (F33) |
| Demand for reserves increases (E41) | Further reserve accumulation unless structural changes occur (E69) |