International competitiveness and currency internationalization: an application to RMB internationalization

This paper aims to explore the relation between international competitiveness and currency internationalization by employing an analytical framework and applying it to RMB internationalization. Our results reaffirm that economic size, financial market development and network externalities are keys in currency internationalization. We also find that international competitiveness is a potential determinant of currency internationalization. However, a more comprehensively and fully measured index of international competitiveness than the GCI is needed to investigate the potential relation between international competitiveness and currency internationalization. The RMB could become an international reserve currency that is larger than the Japanese yen and the British pound sterling, but still lags far behind the US dollar and the euro by 2035. Given the network externalities and historical experience of currency internationalization, however, it will be a long and bumpy process for the RMB to become an international currency, particularly an international reserve currency.Highlights Exploring the relation between international competitiveness and currency internationalization; Reaffirming economic size, financial market development and network externalities as keys in currency internationalization; International competitiveness is a potential determinant of currency internationalization; The RMB could become an international reserve currency by 2035; RMB internationalization will be a long and bumpy process.