ISA 2013: Yuan Swap Paper

Sent out my Yuan swap paper with Dan McDowell to ISA 2013. Paper can be accessed here. Abstract copied below:

For several years now China has implemented policies to promote the international use of its national currency, the Renminbi (RMB). As part of these efforts, the People’s Bank of China (PBC) has negotiated 21 bilateral currency swap agreements (BSAs) with foreign central banks that make it easier for firms in both China and its partner countries to settle cross- border trade and direct investment in RMB. The primary goal of this paper is to explain why China and these partner countries are cooperating via BSAs. We argue that trade and direct investment interdependence between China and potential partner countries should be associated with an increased probability of BSA cooperation. We theorize that trade and direct investment interdependence is linked to BSA cooperation via two mechanisms: (1) trade financing insulation from international liquidity shocks and (2) reduced transaction costs of cross-border trade and direct investment for local firms. Controlling for a number of other potentially relevant factors, our empirical results support a trade interdependence hypothesis: the probability that a country enters a BSA with the PBC increases as it becomes increasingly trade dependent on China. However, this effect is most robust when China is also highly trade dependent on the partner country.