Posted by: mulrickillion | October 22, 2011

Internationalization of Emerging Market Currencies: A Balance between Risks and Rewards

By Samar Maziad, Pascal Farahmand, Shengzu Wang, Stephanie Segal, and Faisal Ahmed, under the direction of Isabelle Mateos y Lago and Udaibir Das

International Monetary Fund (IMF) Staff Discussion Note, October 19, 2011, SDN/11/17

[An excerpt from the Executive Summary reads]:

The global financial crisis and its aftermath renewed the debates relating to the functioning of the international monetary system (IMS). One dimension of this debate is the potential for a more multi-currency system and its implications. Today, the IMS is characterized by a handful of currencies that have achieved varying degrees of internationalization, with the U.S. dollar and the euro as the main ―global‖ currencies, but there are signs that the system is evolving toward a greater role for emerging market (EM) currencies, reflecting both strong fundamentals in EMs and an appetite for diversification among investors. Against this backdrop, this paper surveys the evolving landscape of international currencies; examines the potential for internationalizing a select number of EM currencies; and explores benefits/risks to individual countries and the IMS more broadly—both from policy and operational perspectives.

The limited role of EM currencies in international transactions stands in sharp contrast to their growing weight in the global economy, which is in itself a source of stress to the functioning of the IMS. International experience has shown economic size—including trade networks—macroeconomic stability, and policy support are important determinants of currency internationalization. In this light, only a few EM currencies, led by the Chinese renminbi (RMB), show potential for internationalization on a global scale, albeit many more could achieve some degree of international use. This process, however, will require deeper financial markets and further progress to reform and liberalize the capital account, along with other macroeconomic and structural policies that are beneficial on their own merits. In that sense, and for those countries with potential, internationalization of currency may well come simply as a by-product of their broader reform agenda. . . .

>>Read the full Staff Discussion note here (sdn1117.pdf).

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