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Currency Circle, International Seigniorage and Exchange Rate Elasticity
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TitleCurrency Circle, International Seigniorage and Exchange Rate Elasticity  
AuthorXu Tao, Wang Wenhao and Yang Weizhi  
OrganizationShandong University; The People’s Bank of China;; 
Key WordsInternational Seigniorage; Currency Circle; Exchange Rate Elasticity; RMB Internationalization 
AbstractOne significant benefit from currency internationalization is that the currency issuing country could obtain international seigniorage. What is the internal mechanism between currency internationalization and international seigniorage obtainment, and what is the relationship between this mechanism and exchange rate fluctuation? This paper proposes the thought of “Currency Circle” as the theoretical basis, and illustrates the natural process of differentiation between the obtainment countries and the payment countries on international seigniorage under the assumption of comparative advantage. Considering the impact of exchange rate, this paper demonstrates the connection between international seigniorage and exchange rate elasticity by expanding Fisher Equation. The empirical analysis on the quarterly data from 1999 to 2015 of 7 dominated international currencies support our theoretical prediction. Our main conclusions are: 1) The differences in comparative advantages contribute to the natural differentiation process of the obtainment countries and the payment countries in international seigniorage. Technical progress may alter their status, but the variation of exchange rate could weaken this alteration. 2) For those obtainment countries, the smaller of their exchange rate elasticity under direct quotation on inward foreign capital is, or the larger of their exchange rate elasticity under indirect quotation on outward domestic capital is, the easier they could obtain the seigniorage. 3) The international seigniorate is one of the significant benefit in RMB internationalization, but we should maintain keen vigilance on the risk of seigniorage reversion. 
Serial NumberWP1100 
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