Costs and benefits of currency internationalisation: theory and the experience of emerging countries

Abstract

Currency internationalisation is understood as the process in which a domestic currency is used for various purposes between a resident and a non-resident, specially, in transactions between non-residents. Evidence of strong currency internationalisation is when the agents of a foreign country adopt that currency as their national currency (dollarization). Literature focuses on developed economies. The main benefits are: reduction of transaction costs; international seigniorage; macroeconomic flexibility; leverage gain; and reputation. Currency internationalisation comes at relevant costs, especially for emerging countries. Given the globalisation process and the increasing demand for an international currency, them may be subjected to excessive exchange rate volatility. With the internationalisation of currencies issued by emerging countries (which, in contrast with central currencies, are only internationalised across a few functions of money), a question needs to be posed: the actual costs outweigh the benefits of such a partial currency internationalisation?