Research On Currency Substitution And Renminbi-ization In Open Economy

After Warâ…¡ended, the barrier of market exchange gradually was cancelled. Especially, since the 70's of the 20th century, along with the collapse of the Bretton Woods system, the establishment of diversified exchange rate system as well as the unceasing strength of integration tendency of global economy, currency substitution gradually becomes a kind of globalization phenomenonAs far as RMB is concerned, there are two kinds of currency substitution, that is, one is RMB is substituted by foreign currency, the other is RMB substitutes for other national currencies, so called"RMB-ization". Along with the increase of prestige of RMB, especially, since the reform of the formation mechanism of the exchange rate of RMB on July 21, 2005, RMB has unceasingly appreciated compared with USD. Thus, the degree of RMB substituted by foreign currencies is more and more low. Instead, the phenomenon of RMB substituting for other national currencies is more serious day by day. After all, RMB is neither complete convertibility nor international currency. Therefore, how did the phenomenon of RMB-ization influence the economic development of China? Which degree did the RMB-ization develop to? What did cause RMB-ization? Whether should an optimum currency area (OCA) about RMB be constructed? The currencies of developed countries substituted for the currencies of developing countries formerly, but now it is that a currency of developing country substituted for other national currencies. How to explain the special phenomenon theoretically? According to above problems, the paper analyzes these problems from the view of Currency Substitution Theory so as to form a theoretical study framework about currency substitution and RMB-ization in open economy.The paper is fivefold. Section I is the introduction, namely chapter 1. Sectionâ…¡discusses currency substitution in open economy, including chapter 2, 3, 4 and 5. Sectionâ…¢analyzes international review about the phenomenon of currency substitution, namely chapter 6. Sectionâ…£analyzes RMB-ization, including chapter 7 and 8. The last section is conclusions.Chapter 1 is introduction, it introducts the background and significance of research, the status quo of domestic and foreign research, ideas, content and method, the innovation and insufficiency of this paper.Chapter 2: the definition and measures of currency substitution. It gives a definition of currency substitution. Moreover, it introduces the different measures of currency substitution which mainly have the absolute indexes and the relative indexes. Cross-border deposits are regarded as the absolute indexes reflecting currency substitution. The relative indexes reflecting the variable degree of currency substitution mainly include Morishima Elasticities of Substitution, etc. This chapter thinks the relative indexes can reflect the serious degree of currency substitution in a country well much after analyzing.Chapter 3: the pure theoretical analysis of currency substitution. After analyzing Currency Substitution Theory based on direct monetary demand which mainly introduce series combination balance theory and portfolio balance theory and Currency Substitution Theory based on indirect monetary demand of the first order utility function, this chapter thinks that these theories have limitation and cannot explain the operation mechanism of currency substitution well. Thus the paper elaborates the essence of currency substitution from the view of currency competitionChapter 4: the analysis of influence factor of currency substitution. This chapter analyzes the influence factor of currency substitution from the view of non-economic and economic factors, indicates that political factor, scale variable, macroeconomic conditions, transaction cost of financial market as well as monetary network externalities affect the selection of people to local currency or foreign currency, and proves it through the empirical analysis.Chapter 5: the benefits and costs of currency substitution. This chapter analyzes currency substitution has an effect on economic development from the view of benefits and costs. It points out that currency substitution is a double-edged sword. After the phenomenon of currency substitution appeared, it can bring benefits as well as costs to both the country whose currency was substituted by other currencies and the country whose currency substituted for other currencies.Chapter 6: international review about the phenomenon of currency substitution. Along with the appearance of economical globalization, currency substitution also becomes a kind of globalization phenomenon. Dollarization in Latin American is a representative of currency substitution. This chapter analyzes the phenomenon of dollarization in Latin American and sums up the characteristic and causes of dollarization. Moreover, this chapter analyzes the phenomenon that RMB is substituted by foreign currency (mainly U. S. dollars) integrating the actual situation of China, which comes to the conclusion that the degree of RMB substituted by U. S. dollars is extremely low. It is impossible to appear such dollarization as Latin American in China. This kind of low dollarization is advantageous to economic development of China.Chapter 7: demonstration review about RMB-ization. This chapter analyzes RMB-ization utilizing Currency Substitution Theory. It gives a definition of RMB-ization, and reckons up the amount of RMB being poured into Hongkong using an econometrics model. On the basis of it,this chapter analyzes the causes of RMB circulating in Hongkong and discusses that RMB-ization has positive and negative effect on the economic development to both the inland and Hongkong. Chapter 8: the construction of OCA about RMB. After analyzing traditional OCA Theory, this chapter thinks the former theories all analyze the conditions of OCA in advance of the economy and analyzes the representative of OCA, namely European Currency Integration. The paper breaks through the traditional OCA Theory, proposes setting up an OCA based on currency substitution and analyses the feasibility that this kind of OCA is constructed by a theoretical model. Moreover, this chapter discusses an OCA about RMB is constructed integrating the actual situation of China.The last is conclusions. It summarizes the major point of the full text and puts forward the future research.The paper presents the following innovative views:1. The paper systematically elaborates the study progress of Currency Substitution Theory in open economy and set up a research framework on currency substitution.The paper defines the concept of currency substitution, elaborates the essence of currency substitution from the view of currency competition, and analyzes the influence factor of currency substitution from the view of non-economic and economic factors, especially proves that political factor, scale variable, macroeconomic conditions, transaction cost of financial market as well as monetary network externalities are the main causes of currency substitution through the empirical analysis, and analyzes currency substitution has an effect on economic development from the view of benefits and costs. Therefore, the paper constructs a relatively whole research framework on currency substitution.2. The paper systemically analyzes the phenomenon of RMB-ization using Currency Substitution Theory, constructs a relatively whole research system on RMB-ization, and provides theoretical basis for researching OCA about RMB.The paper defines the concept of RMB-ization from the view of currency substitution, reckons up the amount of RMB being poured into Hongkong using an econometrics model, and empirically analyzes the causes of RMB-ization on the basis of qualitative analysis and further discusses that RMB-ization has positive and negative effect on the economic development to both the inland and Hongkong.3. The paper discusses feasibility of OCA about RMB from the view of currency substitution in order to keep out of the risk of RMB-ization, increase latent income and promote the international position of RMB.The former theories all analyze the conditions of OCA in advance of the economy. The paper breaks through the traditional OCA Theory and proposes setting up an OCA based on currency substitution, that is, analyses the feasibility of OCA by constructing a theoretical model from the view of currency substitution and discusses the assumption and the actualizing condition of OCA about RMB integrating the actual situation of China.