Financial Interdependence and Currency Internationalization
Does financial opening necessarily lead to currency internationalization? To study currency competition under financial interdependence, we develop an asset-demand model with microfounded network effects. Search frictions with currency-specialized intermediaries generate distinct liquidity effects at asset-market and currency-area levels, which jointly influence issuers’ incentives. In the U.S.-China setting, China initially benefits from pooling with dollar, but as its financial markets deepen, RMB issuance allows China to internalize network effects and weaken dollar dominance, triggering fragmentation. Financial sanctions accelerate this transition, while additional issuers generate multiple equilibria in the transition path. Financial interdependence therefore transforms cooperation into rivalry as currency competition evolves.
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Copy CitationZhengyang Jiang, "Financial Interdependence and Currency Internationalization," NBER Working Paper 35541 (2026), https://doi.org/10.3386/w35541.Download Citation
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