Munich Personal RePEc Archive

Trade finance and international currency: a moneatary search approach

Liu, Tao (2016): Trade finance and international currency: a moneatary search approach.

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Abstract

The determinants of international currency received a lot of attention since the great recession. Classic literature focused on economy size and openness, but that couldn't explain why RMB remains largely national, while China is already leading in international trade. In this paper, I verified the importance of financial development for currency internationalization using SWIFT trade finance data. Then I built a two-country monetary search model where trade takes time, and lack of committment makes exporter and importer rely on bank-intermediated finance. The 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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