In search of currency internationalisation: a perspective from financial openness

Abstract This paper examines the role of financial openness for currency internationalisation. We provide a theoretical synthesis on the economic and financial channels that financial openness might affect currency internationalisation. Historical experiences from the UK, the US, Japan and Germany show the essential role played by financial policies to promote one currency’s international status. We collect recent data of a panel of countries to provide an in-depth empirical analysis on how financial openness would affect a currency’s acceptance in international official reserves. We find strong evidence that portfolio positions generally have a larger impact on the currency’s share in international reserves than FDI. Moreover, portfolio positions in the liability side, especially foreign investments in domestic debt securities, have a statistically significant and economically important effect on currency internationalisation. Our results have implications for China, highlighting the specific effects of financial policies on RMB internationalisation.