Invoicing Currency in International Trade: An Empirical Investigation and Some Implications for the Renminbi

Edwin Lai () and Xiangrong Yu ()

The World Economy, 2015, vol. 38, issue 1, 193-229

Abstract: type="main" xml:id="twec12211-abs-0001">

To play the role of a unit of account, an international currency must be a currency widely used to invoice international trade. This paper investigates the determinants of the use of currencies in trade invoicing and evaluates the potential of the renminbi for the denomination of cross-border transactions in the Asia-Pacific region. In particular, we develop a simple model and establish the evidence showing that there is a convex relationship between the invoicing share of a currency and the economic size of its issuing country because of a coalescing effect and thick market externalities. We use the ratio of the foreign exchange (FX) turnover share of a currency to the global GDP share of its issuing country as a proxy for the size of thick market externalities, which we argue reflects capital account openness, financial development and exchange rate stability of the country. This ratio is very small for the renminbi compared with the ratios for established international currencies. Our quantitative analysis suggests that the renminbi can be a major invoicing currency in the region only if China sufficiently opens up its capital account and liberalises its financial sector. We also draw a parallel between the renminbi and the euro and forecast the invoicing share of the renminbi in the Asia-Pacific region if the renminbi market attained the same degree of thickness as the euro.

Date: 2015
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://hdl.handle.net/10.1111/twec.2015.38.issue-1 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Invoicing Currency in International Trade: An Empirical Investigation and Some Implications for the Renminbi (2014)
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:bla:worlde:v:38:y:2015:i:1:p:193-229

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0378-5920

Access Statistics for this article

The World Economy is currently edited by David Greenaway

More articles in The World Economy from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().