Jumpstarting an International Currency

While the USD dominates cross-border transactions today, a few other currencies are also used internationally. This paper shows that central bank policies that reduce the volatility of borrowing costs for foreign firms in domestic currency can trigger a jump-start of the currency’s international status, because choices of the currency of working capital and sales invoicing complement each other. Empirically, the creation of 38 swap lines by the People’s Bank of China between 2009 and 2018 supports this theoretical claim. Signing a swap line with a country increased the probability that it would use the RMB at all by 14%, and its share in the country’s payments by 1.3 percentage points.