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Trade finance and international currency

Liu, Tao (2015): Trade finance and international currency.

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Abstract

The determinants of international currency received a lot of academic attention since great recession. Classical literature focused on economy size and openness, but that couldn't explain why China's currency remains largely national, while it's already the leading country in international trade. To highlight the importance of financial development for currency internationalization, I add trade finance to a two-country monetary search model, where trade takes time, and lack of commitment makes importer and exporter rely on bank-intermediated finance. Agent's currency choice is related with terms of trade, monetary policy, and financial efficiency. Optimal monetary policy differs according to currency regime. Related topic such as size effect and global imbalance is also discussed.

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