Financial Interdependence and Currency Internationalization / Zhengyang Jiang.

Format:

Book

Author/Creator:

Jiang, Zhengyang.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w35541.

NBER working paper series no. w35541

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2026.

Summary:

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.

Notes:

July 2026.

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