Working Paper: NBER ID: w30336
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: No keywords provided
JEL Codes: E0; F2; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| China's policy decisions (O24) | composition of foreign investment in the bond market (G15) |
| initial increase in foreign investment (F21) | more volatile investors (G40) |
| China's gradual liberalization (P19) | reputation in global capital markets (G24) |
| China's reputation increases (F69) | attractiveness for foreign investors (F21) |
| government's choices regarding investor access (G18) | perceived risk of capital flight (F32) |
| perceived risk of capital flight (F32) | stability of the bond market (E43) |