The degree of RMB as an international anchor currency and its driving factors: an exchange rate perspective

This paper provides an alternative method to estimate the degree of RMB internationalization by combining the modified Frankel-Wei's (1994, 2008) weight-inference technique and the state space model. Using a large sample of monthly exchange rate data of 54 economies, we estimate the dynamic currency weights of the U.S. dollar, Euro, RMB, Japanese yen and British pound. Results show that RMB has markedly increased since August 2015 as an international anchor currency, and then gradually decreased from June 2016 to December 2018. The currency weights ranked from highest to lowest are the U.S. dollar, Euro, RMB, British pound and Japanese yen for now. Furthermore, we also find that relative trade openness, capital account openness and exchange rate stability are the key drivers promoting the weight of the RMB. The above findings are robust to a battery of robustness tests. Our research contributes to the literature by providing a dynamic anchor currency weight estimation method and presenting a preliminary explanation for the changes of currency weight.

Automated summary

This paper presents an alternative method to estimate the degree of RMB internationalization by combining the modified Frankel-Wei's weight-inference technique and the state space model. Using a large sample of monthly exchange rate data of 54 economies, the authors estimate the dynamic currency weights of major currencies, including the RMB. The results show fluctuations in the RMB's international anchor currency status and identify the key drivers promoting the weight of the RMB. These findings contribute to the literature and provide valuable insights into the dynamics of currency weights.