Currency internationalization and openness: A paradigm from renminbi

Huiqing Li, Daofan Jia and Jia Li

Review of International Economics, 2023, vol. 31, issue 3, 956-984

Abstract: This article intended to empirically test the interactive effects among renminbi (RMB) internationalization, trade and financial openness. Based on the monthly data from the first month of 2011 to the sixth month of 2018, we first build a vector error correction model includes RMB internationalization index, financial openness, trade openness, inflation rate, exchange rate and economic growth rate. Second, both linear and nonlinear Granger causality tests are conducted to analyze the causality of those variables. The results reveal that financial and trade openness have the greatest effects on the degree to which RMB is internationalized. In the short run, the trade openness will promote the development of RMB internationalization, while the financial openness will restrain such an effect. Long‐term conclusions are the opposite. Meanwhile, financial openness can influence RMB internationalization nonlinearly while RMB internationalization cannot influence financial openness either linearly or nonlinearly. In addition, a strong two‐way nonlinear Granger causality exists between RMB internationalization and exchange rate, and RMB internationalization and trade openness, respectively. Moreover, we find more nonlinear Granger relationships compared to linear Granger relationships, which implied that the relationships between RMB internationalization and other essential elements need to be assessed in the context of a complex nonlinear mechanism. The findings have important policy implication for RMB internationalization and provide a reference to jointly promote currency internationalization and openness.

Date: 2023
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