Discussion Paper Details

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Title: The Future of International Liquidity and the Role of China

Author(s): Alan M. Taylor

Publication Date: January 2013

Keyword(s): China, international reserves, precautionary saving, renminbi, reserve currency and Triffin paradox

Programme Area(s): Economic History and International Macroeconomics

Abstract: This paper analyzes the consequences of the internationalization of the Chinese renminbi for the global monetary system and its possible ascension to reserve currency status. In an unstable and financially integrated world, governments? precautionary demand for reserve assets is likely to increase. But the world then risks a third crisis of the global reserve system, another re-run of the Triffin paradox, with an ever-growing emerging-world insurance demand loaded onto a small group of ever more strained net debt suppliers. Two ways to avoid this outcome would entail either expanding the supply of credible reserve liquidity to include some large emerging-market providers, or finding ways to manage emerging-market risks so as to moderate the perceived need for insurance, and China would have to loom large in both solutions.

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Bibliographic Reference

Taylor, A. 2013. 'The Future of International Liquidity and the Role of China'. London, Centre for Economic Policy Research.