Financial Interdependence and Currency Internationalization

Zhengyang Jiang

No 35541, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Does financial opening necessarily lead to currency internationalization? To study the competition between incumbent and rising powers under financial interdependence, we develop a model of asset demand with microfounded network effects. Search frictions with currency-specialized intermediaries generate distinct notions of liquidity at asset-market and currency-area levels, which jointly shape the trajectory of currency competition. In the U.S.-China context, China at early stages of financial development benefits from pooling its assets with the dollar area, which reinforces the status quo. As China's financial markets deepen, RMB issuance allows China to internalize network effects and erode the dollar's dominance, triggering a discrete shift toward fragmentation. This transition is further shaped by sanctions, financial repression, and third-country responses, highlighting how financial interdependence transforms cooperation into rivalry in the evolution of the international financial order.

JEL-codes: E42 F34 G15 (search for similar items in EconPapers)
Date: 2026-07
Note: AP IFM
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.nber.org/papers/w35541.pdf (application/pdf)
Access to the full text is generally limited to series subscribers, however if the top level domain of the client browser is in a developing country or transition economy free access is provided. More information about subscriptions and free access is available at http://www.nber.org/wwphelp.html. Free access is also available to older working papers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:35541

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w35541
The price is Paper copy available by mail.

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().