IMF Working Papers

Geopolitical Proximity and the Use of Global Currencies

By Jakree Koosakul, Longmei Zhang, Maryam Zia

September 6, 2024

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Format: Chicago

Jakree Koosakul, Longmei Zhang, and Maryam Zia. "Geopolitical Proximity and the Use of Global Currencies", IMF Working Papers 2024, 189 (2024), accessed December 11, 2024, https://doi.org/10.5089/9798400287763.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

After decades of increasing global economic integration, the world is facing a growing risk of geoeconomic fragmentation, with potentially far-reaching implications for the global economy and the international monetary system. Against this background, this paper studies how geopolitical proximity, along with other economic factors, affects the usage of five SDR currencies in cross-border transactions. Since World War II, the global currency landscape has remained relatively stable, with the U.S. dollar serving as the dominant currency. Using country-level SWIFT transaction data, our analysis confirms the importance of inertia, trade and financial linkages in shaping the currency landscape, consistent with existing studies. On geopolitical proximity, we find that closer proximity can boost the use of the euro and renminbi, notably among emerging market and developing economies, although the impact is rather muted in the full sample. The effect on RMB usage in the full sample is more pronounced during periods of heightened trade policy uncertainty. These findings suggest that in a more geoeconomically fragmented world, alternative currencies could play a greater role.

Subject: Central Banks, Currencies, International monetary system, International reserves, International trade, Money, Reserve currencies, Trade policy

Keywords: Currencies, Currency landscape, Currency usage, Global, Heightened trade policy uncertainty, International monetary system, International reserves, Payment currency share, Reserve currencies, SDR currency, Trade policy, Usage pattern

Publication Details

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