【Abstract】

This paper examines the choice of the most frequently used regional currency and discovers a U-shaped relationship between the degree of currency integration and the level of regional trade integration. When the proportion of the most frequently used regional currency is low, its use impedes regional trade. However, upon exceeding a threshold, the prevalence of a dominant regional currency promotes regional trade. This U-shaped relationship can be explained by both transaction cost and political factors. Finally, we provide policy application for “The Belt and Road Initiative” and point out that policy coordination is important to improve RMB internationalization.

【Keywords】

currency; trade integration; international monetary cooperation

【Authors】

He Qing, Senior Research Fellow of IMI, Professor, School of Finance, Renmin University of China. Zhang Ce, School of Finance, Renmin University of China.