The Impact of Yuan Internationalization on the Euro-Dollar Exchange Rate
24 Pages Posted: 14 Mar 2013
Date Written: March 13, 2013
We study the implication of a multipolarization of the international monetary system on cross-currency volatility. More specifically, we analyze whether the internationalization of the yuan could modify the impact of asset supply and trade shocks on the euro-dollar exchange rate, within a three-country, three-currency portfolio model. Our static model shows that the internationalization of the yuan (defined as a rise in the yuan in international portfolios) would be either neutral or stabilizing for the euro-dollar rate, whatever the exchange-rate regime of China. Moving to a dynamic, stock-flow framework, we show that the internationalization of the yuan would make exchange-rate variations more efficient to stabilize net foreign asset positions after a trade shock.
Keywords: China, yuan, exchange-rate regime, euro, dollar
JEL Classification: F310, F330
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