The Impact Of Interest Rate On International Seigniorage

As RMB joined the SDR currencies officially and accounted for 10.92%on October 1st,2016,the internationalization process of RMB made a qualitative leap and started a new phase.RMB has received more international recognition and can be traded without exchange on a larger scale since then,which can have great impact on international seigniorage of China that should not be overlooked.Meanwhile,with the deepening of Chinese interest rate liberalization,the fluctuation of interest rate in China has become more frequent,and interest rate has played an increasingly important role for Chinese economy.Therefore,this essay puts forward an issue:Can interest rate impact international seigniorage?And if so,how?The intention and significance of this essay is to analyze the impact that the fluctuation of interest rate can have on international seigniorage for international currencies.Therefore,we can predict the change of our International seigniorage when there’s any fluctuation of interest rate in China.This has been more meaningful for China since RMB became an international currency.Previous study of International seigniorage focused mostly on the influence of inflation rate or currency supply,and interest rate was seldom mentioned.This essay creatively uses COFER statistics as the proxy variable of International seigniorage,and studies the impact of interest rate on international seigniorage both qualitatively and quantitatively from the angle of the countries which issue international currencies.This essay defines International seigniorage as the economic benefit such as products and resources that can be obtained almost for free by the countries which issue international currencies partly reserved by other countries.Assuming the price of the forward exchange contract is always the same as the spot exchange rate in the future that people expect,according to the uncovered interest parity,we presume that the exchange rate goes down in the future when the interest rate goes up,therefore the international seigniorage reduces through current account.Meanwhile,interest rate should have the same negative effect on international seigniorage though capital account.In order to illustrate this view,this essay manages to deduce that interest rate should surely have negative impact on international seigniorage with the help of Fisher Equation.Now,there are seven official foreign exchange reserve currencies including dollar,euro,pound,Japanese yen,Swiss franc,Australian dollar and Canadian dollar.This essay selects the former five currencies as our subjects,and studies how LIBOR impacts their international seigniorage which is represented by COFFER statistics during the 60 quarters from 2001 to 2015.In the empirical analysis process,we find that the coefficient of the lag term of interest rate is significantly below zero through PCSE.Besides,we get the same conclusion when we take logarithm of international seigniorage and uses comprehensive FGLS and when we uses varying coefficient model for our original model.All in all,we conclude that the increase of interest rate will cause the reduction of international seigniorage in the next period,and vice versa.