## wp1820

## Source details

**Canonical URL:** [wp1820](https://www.imf.org/-/media/files/publications/wp/2018/wp1820.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/wp/2018/wp1820.pdf.md)
- [Structured JSON version](/-/media/files/publications/wp/2018/wp1820.pdf.json)

---

### I. Introduction — context and empirical summaries
- Historical context and research question
  - Post–World War II international monetary system dominated by few currencies; U.S. dollar plays a leading role.
  - Concerns from lack of diversification: liquidity shortages, “exorbitant privileges,” uphill capital flows, distorted fiscal discipline in reserve-issuing countries.
  - Research question: whether global economic transformation (rapid expansion, greater financial integration) produced a more diversified system of reserve currencies.
  - Alternative empirical approach: gauge currency diversification by examining how reserve currencies influence currency fluctuations worldwide (extent to which national currencies are anchored to reserve currencies).
  - Reserve currencies analyzed (IMF SDR basket): GBP, RMB, EUR, JPY, USD.
  - Data coverage for co-movement estimates: period 1969-2015.

- Key empirical summaries (methodologies and headline results)
  - Frankel and Wei (1994) methodology (omits RMB), period 2011-2015:
    - Dollar bloc accounts for about 60 percent of global GDP.
    - Euro bloc accounts for just over 26 percent of global GDP.
    - Pound sterling accounts for about 7 percent of global GDP.
    - Japanese yen accounts for about 5 percent of global GDP.
  - Kawai and Pontines (2016) modified approach (includes RMB), period 2011-2015:
    - U.S. dollar bloc accounts for about 40 percent of global GDP.
    - Renminbi bloc influences about 30 percent of global GDP.
    - Euro bloc influences about 20 percent of global GDP.
    - British pound and Japanese yen blocs influence about 3 and 5 percent of global GDP, respectively.
  - Interpretation:
    - Evidence of a transition from a bi-polar system (USD and EUR) toward a tri-polar system including the RMB, though the U.S. dollar remains dominant.
    - RMB bloc’s economic size is geographically constrained, largely driven by RMB influence on BRICS currencies.
    - No evidence that the RMB is dominant across Asia via influence on Asian exchange rates or supply chains, although RMB does influence some Asian currencies.

### II. Methodology and data
- Two-step currency-bloc allocation and global-size calculation
  - Allocation methods:
    - Absolute allocation: national currency assigned entirely to bloc of dominant reserve currency.
    - Relative allocation: allocate the portion of national currency influenced by each reserve currency to each bloc.
  - Economic-size calculation:
    - Multiply estimated influence (absolute or relative) of each reserve currency on each national currency by country’s annual share in global GDP-PPP; sum across countries to obtain bloc share of global GDP.
    - GDP-PPP chosen as primary metric.

- Regression frameworks and identification issues
  - Frankel and Wei (1994) “workhorse” regression:
    - Regress log-change of currency x against log-changes of EUR, GBP, JPY (and RMB where applicable) using USD numeraire (BIS (2015) recommendation followed for main specification). Results robust to numeraire choice.
    - Omitting RMB addresses collinearity (because RMB was pegged to USD or followed a basket at different times) but risks overstating USD influence and ignores RMB internationalization (began in 2005, picked up in 2009).
  - Kawai and Pontines (2016) modified two-/three-step approach to isolate RMB influence:
    - First step: regress ∆(RMB/NZD) on ∆(USD/NZD), ∆(EUR/NZD), ∆(GBP/NZD), ∆(JPY/NZD) to obtain residuals ߱ෝ
௧ capturing RMB components unexplained by other reserve currencies (NZD chosen as freely floating numeraire).
    - Second step: include RMB residual ߱ෝ
௧ in regressions of other currencies’ ∆(x/NZD) on ∆(USD/NZD), ∆(EUR/NZD), ∆(GBP/NZD), ∆(JPY/NZD) plus ߱ෝ
௧.
    - Third step / modified Frankel-Wei: subtract ߱ෝ
௧ and impose weights-sum-to-one constraint (ߛ
ଵ + ߛ
ଶ + ߛ
ଷ + ߛ
ସ + ߛ
ହ = 1) to recover implied RMB coefficient ߛ
ହ.
  - Estimation details:
    - Monthly end-of-period exchange rates from IFS; annual GDP-PPP from WEO.
    - Two samples: full sample (189 countries, variable coverage) and balanced sample (130 countries complete 1969–2015).
    - Parameter estimates via ordinary least squares with 48-month rolling windows.
    - Coefficients constrained to one or zero where estimates exceeded one or turned negative.
    - Treatment of euro: pre-1999 DM and FF treated as DM and FF, fixed to euro after January 1, 1999.

### III. Econometric results — reserve currencies’ global influence
- Presentation conventions
  - Influence bucketed into quartiles: <25 percent; 25–50 percent; 50–75 percent; 75–100 percent of a country’s currency fluctuation explained by reserve currency.
  - Monthly coefficients averaged using 48-month rolling regressions over January 2011–December 2015.

- Without RMB (Frankel and Wei, Equation 2; average 2011–2015)
  - Geographic coverage and counts:
    - Dollar influence extends to 112 countries across continents.
    - Euro influence extends to 68 countries.
    - Pound influences 5 currencies (including Canada, Chile, New Zealand).
    - Yen has no significant influence beyond its own borders.
  - Absolute-country assignment (full sample):
    - About 60 percent of countries conform to the dollar bloc.
    - 37 percent conform to the euro bloc.
    - 3 percent conform to the British pound bloc.
    - 1 percent conform to the yen bloc.
  - Robustness: balanced sample results similar; geographic distribution differs somewhat from Ilzetzki et al. (2017).

- With RMB (Kawai and Pontines, Equation 5; average 2011–2015)
  - Bloc counts (full sample):
    - Dollar bloc: about 53 percent of world currencies.
    - Euro bloc: 30 percent of countries.
    - RMB bloc: 16 percent of currencies.
    - Pound and yen: relatively marginal roles.
  - RMB influence patterns:
    - RMB appears to influence BRICS (Brazil, Russia, India, China, South Africa).
    - Estimated RMB influence for some large economies in Latin America (Chile, Colombia), the Middle East (e.g., Iran), and Australia.
    - Inclusion of RMB reduces euro’s influence (contrasts with Frankel and Wei where Russia and Brazil were part of euro bloc).
  - Methodological caveat: Equation (5) imposes RHS coefficients sum to one; if not satisfied, RMB estimate may be biased upward. RMB estimates are best interpreted as an upper-range estimate.
  - Sensitivity analyses reported in Section III.D.

- Table 1 (Reserve Currency Blocs—Number of Countries, Average 2011–15, full sample)
  - Dollar: 112 Countries, Share (60.2) [Eq2 full]; 99 Countries, Share (53.2) [Eq5 full]; 77 Countries, Share (59.2) [Eq2 balanced]; 70 Countries, Share (53.8) [Eq5 balanced]
  - Euro: 68 Countries, Share (36.6) [Eq2 full]; 56 Countries, Share (30.1) [Eq5 full]; 47 Countries, Share (36.2) [Eq2 balanced]; 38 Countries, Share (29.2) [Eq5 balanced]
  - Pound: 5 Countries, Share (2.7) [Eq2 full]; 1 Country, Share (0.5) [Eq5 full]; 5 Countries, Share (3.8) [Eq2 balanced]; 1 Country, Share (0.8) [Eq5 balanced]
  - Yen: 1 Country, Share (0.5) [Eq2 full]; 1 Country, Share (0.5) [Eq5 full]; 1 Country, Share (0.8) [Eq2 balanced]; 1 Country, Share (0.8) [Eq5 balanced]
  - Renminbi: ... / ... [Eq2 full]; 29 Countries, Share (15.6) [Eq5 full]; ... / ... [Eq2 balanced]; 20 Countries, Share (15.4) [Eq5 balanced]
  - Notes: full sample up to 186 countries; balanced sample = 130 countries.

### IV. Dynamics over time and economic size of blocs
- Temporal dynamics (balanced sample of 130 countries)
  - Frankel and Wei (relative measure) long-run view:
    - Dollar bloc dominance across time.
    - Early 1970s: dollar influence declines after end of dollar-gold convertibility; rebounds by late 1970s.
    - 1980s: stable dominant dollar with slight decline.
    - 1992 ERM crisis: dollar gains at expense of “euro” bloc.
    - Post-2002: dollar peaks in 2002; euro introduction associated with some dollar loss of ground.
    - 2007–2008 crisis: dollar loses ground, later rebounds.
  - RMB-era perspective (Kawai and Pontines, 2003–2015):
    - Dollar bloc remains dominant.
    - Dollar bloc declines after 2007–2008 crisis coinciding with RMB entry and China’s internationalization policies since 2010.
    - RMB influence stalled since 2014.
    - Interpretation: transition from bi-polar (USD and euro) to tri-polar (including RMB) is underway; USD bloc still greatest global influence.

- Economic-size measures (absolute and relative influence; average 2011–2015)
  - Absolute-influence (Kawai and Pontines; full and balanced samples):
    - Dollar bloc average share: about 40 percent of global GDP between 2011 and 2015.
    - RMB bloc average share: about 33 percent of global GDP.
    - Euro bloc average share: about 20 percent of global GDP.
  - Relative-influence (Kawai and Pontines; average shares):
    - Dollar bloc: 39 percent.
    - RMB bloc: 31.6 percent.
    - Euro bloc: 20.3 percent.
    - Yen bloc: less than 6 percent.
    - Pound bloc: less than 6 percent.
  - Comparison with reserve holdings and official assets:
    - Dollar bloc’s share in global GDP is lower than global share of international reserves or dollar-denominated official foreign reserve assets.
    - RMB bloc’s estimated size across the globe appears to exceed its size as measured by holdings of official foreign reserve assets denominated in RMB.
  - Ranking robustness:
    - Including or excluding reserve-issuing economies yields level effects but not rank reversals; RMB bloc growth not exclusively driven by China’s own economy.

- Table 2 (Economic Size of Currency Blocs — absolute influence, average 2011–2015, percent)
  - Frankel and Wei:
    - Full sample 1/: Dollar 62.4; Euro 26.3; Pound 6.6; Yen 4.7; Renminbi ...
    - Balanced sample 2/: Dollar 64.2; Euro 23.2; Pound 7.4; Yen 5.2; Renminbi ...
  - Kawai and Pontines:
    - Full sample 1/: Dollar 40.7; Euro 19.5; Pound 2.5; Yen 4.8; Renminbi 32.5
    - Balanced sample 2/: Dollar 39.9; Euro 19.6; Pound 2.8; Yen 5.2; Renminbi 32.5
  - Memo comparisons:
    - Reserves shares 3/: Dollar 63.3; Euro 20.3; Pound 4.5; Yen 4.5; Renminbi ...
    - Official foreign reserve assets 4/: Dollar 54.8; Euro 18.1; Pound 3.5; Yen 3.0; Renminbi 1.0
    - SDR weights pre-October 2016 5/: Dollar 41.9; Euro 37.4; Pound 11.3; Yen 9.4; Renminbi ...
    - SDR weights post-October 2016 6/: Dollar 41.73; Euro 30.93; Pound 8.09; Yen 8.33; Renminbi 10.92
  - Notes: 1/ 189 Countries. 2/ 130 Countries. 3/ As of 2014. 4/ As of 2016 Q3. 5/ Pre-October 2016 composition. 6/ Post-October 2016 composition.

### V. Robustness analyses (Section III.D) — key quantitative outcomes
- Dimensions tested: numeraire selection; inclusion of COFER reserve currencies; wider RMB reference-basket; additional controls (oil prices change, global liquidity proxy, VIX).
- Alternative numeraire and point estimates
  - Benchmark NZD numeraire; re-run using CHF yields broadly similar average results over 2011–2015.
  - Using CHF weakens USD bloc in favor of RMB in point estimates; RMB bloc estimated to surpass USD bloc in 2014 in that sensitivity.
- Controlling for additional reserve currencies (add AUD, CAN, CHF) — range estimates
  - RMB absolute-influence average size between 29 percent (lower bound) and 33 percent (upper bound) of global GDP over 2011–2015.
  - RMB relative-influence average size between 27 and 32 percent of GDP over 2011–2015.
  - Dispersion of range widened in recent years.
- Wider set of reference currencies for RMB (add AUD, HKD, MYR, RUB, SGD, THB, CAD, CHF) has little impact on RMB bloc size for absolute and relative influence.
- Additional controls have limited impact on qualitative baseline results:
  - With additional controls, RMB bloc estimated to surpass EUR bloc in 2008; benchmark specification estimates this in 2011.

- Table 4 (Economic Size Influence of Currency Blocs — absolute influence, average 2011–2015, percent of global GDP-PPP; 130 countries)
  - Baseline / Baseline excluding reserve issuing countries / Robustness outcomes:
    - Dollar: Baseline 39.9; Baseline excluding reserve issuing countries 22.0; Alternative numeraire 38.1; Additional reserve currencies 37.1; Wider set of reference currencies for the RMB 39.6; Additional controls 40.3
    - Euro: Baseline 19.6; Baseline excluding reserve issuing countries 6.9; Alternative numeraire 19.2; Additional reserve currencies 16.6; Wider set of reference currencies for the RMB 19.9; Additional controls 17.3
    - Pound: Baseline 2.8; Baseline excluding reserve issuing countries 0.1; Alternative numeraire 4.3; Additional reserve currencies 2.7; Wider set of reference currencies for the RMB 2.8; Additional controls 4.2
    - Yen: Baseline 5.2; Baseline excluding reserve issuing countries 0.0; Alternative numeraire 5.2; Additional reserve currencies 5.2; Wider set of reference currencies for the RMB 5.2; Additional controls 5.2
    - Renminbi: Baseline 32.5; Baseline excluding reserve issuing countries 14.7; Alternative numeraire 33.1; Additional reserve currencies 28.7; Wider set of reference currencies for the RMB 32.5; Additional controls 32.9

- Figure highlights (quantitative)
  - Figure 9 bounds (including additional COFER currencies): absolute influence bounds 29.8 and 33.8 (percent of global GDP-PPP) plotted series for 2003–2015; relative influence bounds 19.8 and 21.7 for 2003–2015.
  - Figure 10: Relative influence compositions 2003–2015 with RMB included among USD, EUR, GBP, JPY; sensitivity to wider RMB references and additional controls shown.

### VI. What determines relative importance of reserve currencies — empirical associations
- Candidate determinants examined (data sources noted)
  - (i) GDP global share (IMF-WEO).
  - (ii) Inflation: annual change in CPI inflation (IMF-WEO).
  - (iii) Current account balance as percent of GDP (IMF-WEO).
  - (iv) Debt: central government debt to GDP (IMF FAD).
  - (v) Trade openness: exports + imports to GDP (World Bank).
  - (vi) Financial openness: reserve currency issuer external assets and liabilities as percent of GDP (Lane and Milesi-Ferretti (2007)-based).
- Methods
  - Series plotted over time; bivariate correlations between relative importance and lagged differences of each proxy; lagged variables used to help establish causal ordering.
  - Frankel and Wei provides longer time series; Kawai and Pontines yields shorter spans.
  - Focus on U.S. dollar bloc, euro bloc, renminbi bloc in main figures.

- U.S. dollar bloc — associations and persistence
  - GDP global share matters for dollar bloc over long run.
  - Negative relationship between inflation and dollar bloc size in Frankel and Wei measure (until global financial crisis); not apparent in Kawai and Pontines measure.
  - Current account deficits seem positively correlated with dollar bloc relative importance.
  - Increases in debt negatively correlated with dollar bloc size; relationship strengthened after global financial crisis when U.S. debt rose from roughly over 60 percent to over 100 percent.
  - Greater financial openness positively correlated with stronger dollar bloc; trade openness relationship less evident.
  - Persistence: autocorrelation of measures is high and close to one.

- Euro bloc — associations and persistence
  - Pre-2002 analysis uses DM and FF jointly.
  - Decline in relative importance of DM and FF accompanied by limited trade/financial openness and shrinking relative economic size of Germany and France.
  - Macro discipline variables did not clearly support FF/DM relative importance in historically more closed environment.
  - Introduction of euro did not produce immediate greater importance; euro gained after global financial crisis but gain was short lived.
  - Euro area debt increased from about 60 to over 90 percent of GDP in more recent years.
  - Persistence: economic persistence high but much less than dollar bloc.

- Renminbi bloc — findings and drivers
  - RMB internationalization is recent.
  - Increasing share of Chinese economy in global economy key driver of RMB bloc growth.
  - Current account surpluses might be negatively correlated with RMB bloc expansion (may have slowed expansion).
  - Debt concerns in China appear to have dented RMB bloc expansion during sample period; coincided with global financial crisis and European debt crisis that also affected dollar and euro blocs.
  - Overall diagnostic:
    - Currency blocs benefit from network externalities and are highly persistent though susceptible to change.
    - Reserve-issuer economic size matters.
    - Debt considerations (proxy for credibility) appear relevant, particularly post-global financial crisis.
    - Some indication current account surpluses may undermine a currency bloc.

### VII. Conclusions — core results and open questions
- Measurement and core results
  - Paper measures diversification by how reserve currencies influence currency fluctuations globally (national currency anchoring to reserve currencies and bloc membership).
  - Confirms lack of reserve diversification; few currencies dominate.
  - U.S. dollar is most dominant among those currencies.
  - RMB has gained significant international influence, particularly among BRICS countries.
  - No evidence of an Asian RMB bloc.
  - Transition from bi-polar (USD and “euro” bloc) to tri-polar (including RMB) is underway.
- Persistence, policy relevance, and open questions
  - Currency-bloc influence is highly persistent; policy credibility matters (RMB internationalization supported by policy actions).
  - Open questions:
    - Will the renminbi bloc expand?
    - Will expansion be sustained and come at expense of the U.S. dollar or other blocs such as the euro?
    - Other challenges may arise from new instruments (e.g., virtual currencies like bitcoin).

*Source: wp1820 (IMF staff calculations using IFS and WEO data; excerpt from Section III of the source PDF).*

### References .............................................................................................................

### wp1820 - References

### I. Introduction — context and objectives
- Historical dominance: The international monetary system after World War II has been dominated by few currencies, with the U.S. dollar playing a leading role.
- Concerned issues from lack of diversification include: liquidity shortages, “exorbitant privileges,” uphill capital flows, and distorted fiscal discipline in reserve-issuing countries.
- Research question: Whether the transformation of the global economy (rapid expansion, greater financial integration) has resulted in a more diversified system of reserve currencies.
- Alternative empirical approach: Gauge currency diversification by examining how reserve currencies influence currency fluctuations worldwide, i.e., the extent to which national currencies are anchored to reserve currencies.
- Reserve currencies analyzed (as in the IMF’s SDR basket): the British pound (GBP), the Chinese renminbi (RMB), the euro (EUR), the Japanese yen (JPY), and the U.S. dollar (USD).
- Data coverage used for co-movement estimates: period 1969-2015.

Key empirical summaries from the analysis:
- Using Frankel and Wei’s (1994) methodology (which omits the RMB):
  - Over the period 2011-2015 the dollar bloc accounts for about 60 percent of global GDP.
  - The euro bloc accounts for just over 26 percent of global GDP.
  - The pound sterling accounts for about 7 percent of global GDP.
  - The Japanese yen accounts for about 5 percent of global GDP.
- Using Kawai and Pontines’ (2016) modified approach (which includes the RMB):
  - The U.S. dollar bloc accounts for about 40 percent of global GDP.
  - The renminbi bloc influences about 30 percent of global GDP.
  - The euro bloc influences about 20 percent of global GDP.
  - The British pound and Japanese yen blocs influence about 3 and 5 percent of global GDP, respectively.
- Interpretation:
  - Evidence suggests a transition from a bi-polar system (dollar and euro) toward a tri-polar system that includes the RMB, though the U.S. dollar remains dominant.
  - The RMB bloc’s economic size is currently geographically constrained, largely arising from the RMB’s influence on BRICS currencies.
  - No evidence found that the RMB is the dominant currency in Asia through influence on Asian exchange rates or supply chains, though RMB does have influence across some Asian currencies.

Empirical relationships examined:
- The size of currency blocs (share in global GDP-PPP) is highly persistent, consistent with network externalities in reserve currency use.
- Economic size of a reserve-issuing country appears central to supporting a currency bloc.
- Increased debt levels are correlated with a decline in the importance of the USD and the EUR currency blocs.
- Current account surpluses appear to undermine the size of currency blocs.

### II. Methodology and data — framework and estimation strategy
- Two-step calculation:
  1. Place each currency in a reserve currency bloc/zone (dollar, euro, pound, renminbi, or yen) using two alternative allocation methods:
     - Absolute allocation: a national currency is assigned entirely to the bloc of the dominant reserve currency.
     - Relative allocation: only the portion of the national currency influenced by each reserve currency is allocated to each bloc.
  2. Calculate the share of global GDP-PPP that falls under the influence of each major reserve currency (economic size of each currency bloc).

- Primary regression framework: Frankel and Wei (1994) “workhorse” regression estimating co-movements of individual currencies with major reserve currencies via log changes in bilateral exchange rates to ensure stationarity of coefficients.
  - Equation structure: log-change of currency x against a chosen numeraire regressed on log-changes of EUR, GBP, JPY, and RMB (where applicable) against the same numeraire, plus an error term.
  - Numeraire selection: the BIS (2015) recommendation to use the U.S. dollar as the numeraire is followed for the main specification so that a currency is assigned to the dollar bloc if its movements against the dollar have nothing in common with the euro, yen, or renminbi. Results are reported as robust to this choice.

- Collinearity problem:
  - Including the RMB directly in equation (2) generates collinearity because the RMB was pegged to the dollar or followed a basket at different times, constraining the ability to identify the RMB’s separate influence.
  - The standard workaround of excluding the RMB from Frankel and Wei’s specification can econometrically overcome collinearity but risks overestimating U.S. dollar influence and ignores RMB internationalization that accelerated after 2005 and picked up in 2009.

### III. Modified approach to identify an RMB bloc (Kawai and Pontines, 2016)
- Two-step modified regression to isolate RMB influence:
  - First step (equation (3)): Regress RMB changes (measured against the New Zealand dollar, NZD) on changes in USD, EUR, GBP, and JPY (also measured against NZD) to obtain residuals ߱ෝ
௧ that capture components of RMB movements not explained by other reserve currencies.
    - NZD chosen as numeraire because it is a freely floating currency without capital or exchange controls.
    - Equation (3) can be interpreted as revealing weights the Chinese authorities accord to major reserve currencies in their own exchange rate basket.
  - Second step (equations (4) and (4.a)): Use the residuals from the first step, ߱ෝ
௧, in a regression of other currencies’ log-changes (measured against NZD) on the log-changes of USD, EUR, GBP, and JPY (measured against NZD) plus the RMB residual ߱ෝ
௧.
    - The construction of ߱ෝ
௧ is:
      - ߱ෝ
௧ = ∆(RMB/NZD) − [estimated contributions of USD, EUR, GBP, JPY to ∆(RMB/NZD)] (see equation (4.a) for formal expression).
  - Third step / modified Frankel-Wei (equation (5)): Subtract ߱ෝ
௧ on both sides and impose that the currency weights sum to one (ߛ
ଵ + ߛ
ଶ + ߛ
ଷ + ߛ
ସ + ߛ
ହ = 1), yielding a modified regression for any currency x that delivers implied RMB coefficient ߛ
ହ = 1 − (ߛ
ଵ + ߛ
ଶ + ߛ
ଷ + ߛ
ସ).
- Outcome:
  - Estimation of equation (5) yields degree-of-influence coefficients ߛ
௞ for k = USD, EUR, JPY, GBP, and RMB for each national currency.
  - Currency allocation to blocs uses both the absolute and relative concepts described above.

### IV. Methodological implications and limitations
- Frankel and Wei’s (1994) framework (when the RMB is omitted) is useful for historical perspective but risks overstating USD influence in recent decades where RMB internationalization matters.
- Kawai and Pontines’ (2016) modified approach allows quantification of a global RMB bloc and mitigates collinearity by removing RMB components first; previously it had been applied mainly to Asia, not the global level.
- Identification challenges arise because China’s exchange regime changed over time (RMB pegged to USD at certain times, to a basket at others), and the RMB’s internationalization timeline (began in 2005 and picked up in 2009) affects interpretation of weights.
- Numeraire choices matter; the paper follows BIS (2015) in using USD for the main Frankel-Wei regressions and NZD for the Kawai-Pontines first-stage regressions.

*Source: https://www.imf.org/-/media/files/publications/wp/2018/wp1820.pdf*

### Section III.D shows that results are robust even when considering a wider reference basket of currencies for the

### wp1820 - Section III.D shows that results are robust even when considering a wider reference basket of currencies for the

### B. Calculating the size of a currency bloc
- Methodology overview:
  - Two measures for reporting size of currency blocs:
    - Absolute measure: allocates a national currency to the reserve currency with the largest influence in that country.
    - Relative measure: aggregates the relative influence of each reserve currency on each national currency across the world.
  - Economic size calculation:
    - Multiply the estimated influence of each reserve currency on each national currency (absolute or relative) by the country’s annual share in global GDP in purchasing power parity (GDP-PPP) terms.
    - Sum across all countries to obtain the economic size of each reserve currency bloc (measured as a share of global GDP).
  - GDP-PPP chosen as the primary metric for global influence because it is comprehensive and widely available across countries.

### C. Data and estimation
- Data sources and samples:
  - End-of-period monthly exchange rates from IMF’s International Financial Statistics (IFS).
  - Annual GDP-PPP data from the IMF’s World Economic Outlook (WEO) database.
  - Two samples:
    - Global sample: 189 countries (not all have complete data for entire period).
    - Balanced sample: 130 countries with complete data for 1969 to 2015; used to examine trends.
- Estimation approach:
  - Parameter estimates of equations (2) and (5) obtained using ordinary least squares with 48-month rolling windows.
  - Reserve-issuing countries are assumed to belong to their own reserve currency bloc (robustness checks reported when dropping this assumption).
  - Coefficients restricted to be one or zero where estimated coefficients exceeded one or turned negative.
- Treatment of the euro:
  - Prior to 1999, reserve currencies treated as Deutsche mark (DM) and French franc (FF); after January 1, 1999 DM and FF are fixed to the euro and estimates for the euro are obtained using that linkage.

### III. Econometric results
#### A. Reserve currencies’ influence across the world
- Presentation conventions:
  - Influence placed into quartile buckets: (i) less than 25 percent; (ii) between 25 and 50 percent; (iii) between 50 and 75 percent; (iv) between 75 and 100 percent of a country’s currency fluctuation explained by the reserve currency.
  - Monthly coefficients averaged using 48-month rolling regressions over January 2011–December 2015.
- A view without the RMB (Frankel and Wei’s 1994 approach, Equation 2):
  - Dollar dominance:
    - Dollar’s influence extends to 112 countries across all continents.
    - Euro’s influence extends to 68 countries.
    - British pound influences 5 currencies (including Canada, Chile, New Zealand).
    - Yen has no significant influence beyond its own borders.
  - Absolute-country assignment (full sample, third column reported):
    - About 60 percent of countries conform to the dollar bloc.
    - 37 percent conform to the euro bloc.
    - 3 percent conform to the British pound bloc.
    - 1 percent conform to the yen bloc.
  - Results robust for the balanced sample; geographic distribution differs somewhat from Ilzetzki et al. (2017).
- A view with the RMB (Kawai and Pontines’ 2016 approach, Equation 5):
  - Bloc counts (full sample, fifth column reported):
    - Dollar bloc: about 53 percent of the currencies of the world.
    - Euro bloc: declines to 30 percent of countries.
    - RMB bloc: comprises 16 percent of the currencies.
    - British pound and Japanese yen: relatively marginal roles.
  - RMB influence patterns:
    - RMB appears to influence BRICS countries (Brazil, Russia, India, China, South Africa).
    - RMB influence also estimated for some large economies in Latin America (Chile, Colombia), the Middle East (e.g., Iran), and Australia.
    - Including the RMB reduces the euro’s influence (contrasts with Frankel and Wei where Russia and Brazil were part of the euro bloc).
  - Methodological caveat:
    - Equation (5) imposes that coefficients on the right-hand side sum to one formally, but if not the case the RMB estimate will be biased.
    - Any currency movement unexplained by considered reserve currencies may be attributed to the RMB; therefore RMB estimates are best interpreted as an upper-range estimate.
  - Sensitivity analyses are conducted in Section III.D to assess robustness and bounds.

- Table 1: Reserve Currency Blocs—Number of Countries (Average 2011-15, full sample)
  - Columns: Currency bloc; Full Sample Equation 2; Full Sample Equation 5; Balanced Sample Equation 2; Balanced Sample Equation 5
  - Dollar: 112 Countries, Share (60.2) [Eq2 full]; 99 Countries, Share (53.2) [Eq5 full]; 77 Countries, Share (59.2) [Eq2 balanced]; 70 Countries, Share (53.8) [Eq5 balanced]
  - Euro: 68 Countries, Share (36.6) [Eq2 full]; 56 Countries, Share (30.1) [Eq5 full]; 47 Countries, Share (36.2) [Eq2 balanced]; 38 Countries, Share (29.2) [Eq5 balanced]
  - Pound: 5 Countries, Share (2.7) [Eq2 full]; 1 Country, Share (0.5) [Eq5 full]; 5 Countries, Share (3.8) [Eq2 balanced]; 1 Country, Share (0.8) [Eq5 balanced]
  - Yen: 1 Country, Share (0.5) [Eq2 full]; 1 Country, Share (0.5) [Eq5 full]; 1 Country, Share (0.8) [Eq2 balanced]; 1 Country, Share (0.8) [Eq5 balanced]
  - Renminbi: ... / ... [Eq2 full]; 29 Countries, Share (15.6) [Eq5 full]; ... / ... [Eq2 balanced]; 20 Countries, Share (15.4) [Eq5 balanced]
  - Notes:
    - Equation 2 = Frankel and Wei (1994); Equation 5 = Kawai and Pontines (2016).
    - Full sample number of countries varies, with a maximum of 186 countries.
    - Balanced sample = 130 countries throughout the sample.

#### B. Dynamics of currency blocs over time
- Dataset and approach:
  - Use balanced sample of 130 countries for comparability over time.
  - Frankel and Wei’s methodology (Equation 2) provides a longer historical perspective but omits the RMB.
  - Relative measure used for time-series presentation.
  - Prior to 1999 DM and FF merged and reported as “euro.”
- Key historical dynamics (relative measure, Figure 4):
  - Dollar bloc dominance observed across time series.
  - Early 1970s: decline in dollar influence following end of dollar-gold convertibility; rebound by late 1970s.
  - 1980s: dollar’s dominant position stable with slight declining trend.
  - 1992 ERM crisis: gave the dollar a boost at expense of the “euro” bloc.
  - Post-2002: dollar peaked in 2002; introduction of the euro associated with some dollar loss of ground.
  - 2007-2008 global financial crisis: dollar appears to lose ground again; concerns at the time about dollar’s “exorbitant privilege” were discussed but the dollar subsequently rebounded.
- RMB-era perspective (Kawai and Pontines’ methodology, 2003–2015):
  - Dollar bloc remains dominant.
  - Decline of dollar bloc following 2007-2008 crisis coincides with RMB’s entry and China’s active internationalization policies since 2010.
  - RMB’s influence appears to have stalled since 2014.
  - Interpretation: international monetary system has shifted from bi-polar (USD and euro) to tri-polar (including RMB), but dollar bloc continues to have greatest global influence.

#### C. Economic size of currency blocs
- Measurement approaches:
  - Absolute influence-based economic size (Figure 5).
  - Relative influence-based economic size (Figure 6).
  - Focus discussion primarily on Kawai and Pontines’ methodology because it includes the RMB; Frankel and Wei’s excludes RMB and thus assigns China to the dollar bloc.
- Absolute-influence results (average 2011-2015):
  - Kawai and Pontines’ estimates (full and balanced samples):
    - Dollar bloc average share: about 40 percent of global GDP between 2011 and 2015.
    - RMB bloc average share: about 33 percent of global GDP.
    - Euro bloc average share: about 20 percent of global GDP.
  - Comparison with reserve holdings:
    - Dollar bloc’s share in global GDP is lower than the global share of international reserves or of dollar-denominated official foreign reserve assets.
    - RMB bloc’s estimated size across the globe appears to exceed its size as measured by holdings of official foreign reserve assets denominated in RMB.
- Sensitivity to issuer inclusion:
  - Figure 5 compares economic size including and excluding the economy issuing the reserve currency.
  - Level effects exist, but ranking of economic importance is not driven solely by presence of the issuer economy.
  - Rising global influence of the RMB bloc is not exclusively associated with China’s own economy size, indicating expanding RMB influence beyond China’s borders.
- Relative-influence results (average 2011-2015):
  - Kawai and Pontines’ methodology, average shares of global GDP:
    - Dollar bloc: 39 percent.
    - RMB bloc: 31.6 percent.
    - Euro bloc: 20.3 percent.
    - Yen bloc: less than 6 percent.
    - Pound bloc: less than 6 percent.
  - Likely drivers:
    - The estimated importance of the RMB bloc reflects the large size of its constituents, including China.
  - Measured in PPP terms, the RMB bloc has in recent years rivaled the U.S. dollar bloc in size.

- Table 2: Economic Size of Currency Blocs (Measured by the absolute influence of reserve currencies, average 2011-2015, in percent)
  - Frankel and Wei’s approach:
    - Full sample 1/: Dollar 62.4; Euro 26.3; Pound 6.6; Yen 4.7; Renminbi ...
    - Balanced sample 2/: Dollar 64.2; Euro 23.2; Pound 7.4; Yen 5.2; Renminbi ...
  - Kawai and Pontines’ approach:
    - Full sample 1/: Dollar 40.7; Euro 19.5; Pound 2.5; Yen 4.8; Renminbi 32.5
    - Balanced sample 2/: Dollar 39.9; Euro 19.6; Pound 2.8; Yen 5.2; Renminbi 32.5
  - Memo comparisons:
    - Reserves shares 3/: Dollar 63.3; Euro 20.3; Pound 4.5; Yen 4.5; Renminbi ...
    - Official foreign reserve assets 4/: Dollar 54.8; Euro 18.1; Pound 3.5; Yen 3.0; Renminbi 1.0
    - SDR weights pre-October 2016 5/: Dollar 41.9; Euro 37.4; Pound 11.3; Yen 9.4; Renminbi ...
    - SDR weights post-October 2016 6/: Dollar 41.73; Euro 30.93; Pound 8.09; Yen 8.33; Renminbi 10.92
  - Notes:
    - 1/ 189 Countries.
    - 2/ 130 countries.
    - 3/ As of 2014 (RMB not considered freely usable then, not counted as part of international reserves).
    - 4/ As of 2016 Q3.
    - 5/ Pre-October 2016 currency composition.
    - 6/ Post-October 2016 currency composition.

- Overall interpretation:
  - The dollar bloc remains the largest and most influential across the globe by multiple measures.
  - The RMB bloc has grown substantially and in PPP terms has rivaled the U.S. dollar bloc in recent years, though its rise appears to have lost momentum since 2014.
  - Methodological choices (inclusion/exclusion of RMB, absolute vs relative measures) materially affect allocations, particularly for large economies like China.

*Source: IFS and WEO. Fund staff calculations (excerpt from wp1820, Section III).*

### Section 3.B (Figure 6). Nonetheless, our results suggest that the dollar bloc’s relative

### Section 3.B (Figure 6)

### Major findings on currency bloc size and trends
- Using Frankel and Wei’s methodology, the dollar bloc’s relative economic influence displays a slight gradual upward trend, driven mostly by the larger economic share of the dollar’s constituents.
- Kawai and Pontines’ approach does not show a similar upward trend for the dollar bloc; instead it suggests the share size of the dollar bloc declined following the global financial crisis and has stabilized since 2012.
- Results confirm the increasing economic importance of the RMB bloc (Figure 6, right-hand panel), with the steady increasing influence of the RMB losing some steam since 2013.
- Comparing bloc measures including and excluding reserve-issuing economies indicates:
  - Underlying dynamics have a level effect, but the ranking is not driven by the economic weight of the reserve-issuing economies themselves (Figure 7).
  - The relative decline of the U.S. dollar bloc after the global financial crisis could have been sharper and its rebound more modest when excluding reserve-issuing economies.

### Key statistics from Figure 6 and Table 3 (average 2011-2015, percent of global GDP-PPP)
- Frankel and Wei’s approach (Full sample 1/; Balanced sample 2/):
  - Dollar: Full sample 59.0; Balanced sample 60.1
  - Euro: Full sample 27.7; Balanced sample 26.7
  - Pound: Full sample 8.3; Balanced sample 7.8
  - Yen: Full sample 5.0; Balanced sample 5.4
  - Renminbi: represented as "..." in Frankel and Wei’s table entries for these samples
- Kawai and Pontines’ approach (Full sample 1/; Balanced sample 2/):
  - Dollar: Full sample 39.0; Balanced sample 37.9
  - Euro: Full sample 20.3; Balanced sample 19.8
  - Pound: Full sample 4.0; Balanced sample 4.3
  - Yen: Full sample 5.2; Balanced sample 5.6
  - Renminbi: Full sample 31.6; Balanced sample 32.4
- Memo lines:
  - Reserves shares 3/: Dollar 63.3; Euro 20.3; Pound 4.5; Yen 4.5; Renminbi "..."
  - Official Foreign Reserve Assets 4/: Dollar 54.8; Euro 18.1; Pound 3.5; Yen 3.0; Renminbi 1.0
  - SDR weights 5/ (Pre-October 2016): Dollar 41.9; Euro 37.4; Pound 11.3; Yen 9.4; Renminbi "..."
  - SDR weights 6/ (Post-October 2016): Dollar 41.73; Euro 30.93; Pound 8.09; Yen 8.33; Renminbi 10.92
- Notes:
  - 1/ 189 Countries.
  - 2/ 130 countries.
  - 3/ As of 2014. At the time the RMB was not considered by the IMF a freely usable currency.
  - 4/ As of 2016 Q3.
  - 5/ Pre-October 2016 currency composition.
  - 6/ Post-October 2016 currency composition.

### Robustness analysis — summary and quantitative results
- Dimensions examined: (i) selection of numeraire currency; (ii) inclusion of all COFER reserve currencies; (iii) inclusion of additional currencies to control for RMB’s wider basket; (iv) role of additional controls.
- Alternative numeraire:
  - Benchmark uses NZD as numeraire; results re-run using CHF show broadly similar average results over 2011-2015 for absolute and relative influence.
  - Using CHF as numeraire weakens the USD bloc in favor of the RMB bloc in point estimates; RMB bloc estimated to surpass USD bloc in 2014 (Figure 8).
- Controlling for additional reserve currencies (adding AUD, CAN, CHF) produces range estimates:
  - Average economic share size of the RMB’s currency bloc (absolute influence) between 29 percent (lower bound) and 33 percent (upper bound) of global GDP over 2011-2015.
  - Average size of the RMB bloc measured by relative influence estimated between 27 and 32 percent of GDP over 2011-2015.
  - Dispersion of the range has widened in recent years.
- Wider set of reference currencies for the RMB (adding AUD, HKD, MYR, RUB, SGD, THB, CAD, CHF) has little impact on the size of the RMB’s bloc for both absolute and relative influence.
- Additional controls (change in oil prices, global liquidity proxied by the spread between the U.S. short term interbank rate and the U.S. Treasury bill rate, VIX) do not have a significant impact relative to the benchmark specification; qualitative baseline results remain the same.
  - With additional controls the RMB bloc is estimated to surpass the EUR bloc in 2008; benchmark specification estimates this in 2011 (Figure 10).

### Table 4 — Economic Size Influence of Currency Blocs (absolute influence, average 2011-2015, percent of global GDP-PPP) — robustness outcomes (130 countries) 
- Baseline / Baseline excluding reserve issuing countries / Robustness Analysis:
  - Dollar: Baseline 39.9; Baseline excluding reserve issuing countries 22.0; Alternative numeraire 38.1; Additional reserve currencies 37.1; Wider set of reference currencies for the RMB 39.6; Additional controls 40.3
  - Euro: Baseline 19.6; Baseline excluding reserve issuing countries 6.9; Alternative numeraire 19.2; Additional reserve currencies 16.6; Wider set of reference currencies for the RMB 19.9; Additional controls 17.3
  - Pound: Baseline 2.8; Baseline excluding reserve issuing countries 0.1; Alternative numeraire 4.3; Additional reserve currencies 2.7; Wider set of reference currencies for the RMB 2.8; Additional controls 4.2
  - Yen: Baseline 5.2; Baseline excluding reserve issuing countries 0.0; Alternative numeraire 5.2; Additional reserve currencies 5.2; Wider set of reference currencies for the RMB 5.2; Additional controls 5.2
  - Renminbi: Baseline 32.5; Baseline excluding reserve issuing countries 14.7; Alternative numeraire 33.1; Additional reserve currencies 28.7; Wider set of reference currencies for the RMB 32.5; Additional controls 32.9
- Sources: International Financial Statistics and World Economic Outlook. Fund staff calculations.
- Note: 1/ 130 countries. 2/ For a description of the robustness analysis see text. 3/ Sum does not add to one as other reserve currencies are included in the estimation.

### Figure 9 and Figure 10 quantitative highlights
- Figure 9 (range bound estimate including additional COFER currencies):
  - Absolute influence bounds shown: 29.8 and 33.8 (percent of global GDP-PPP) in plotted series for 2003–2015.
  - Relative influence bounds shown: 19.8 and 21.7 in plotted series for 2003–2015.
- Figure 10 (sensitivity: wider set of reference currencies for the RMB; additional controls) shows:
  - Relative influence compositions by currency over 2003–2015 with RMB included among USD, EUR, GBP, JPY.

### What determines the relative importance of reserve currencies? — overview
- Determinants highlighted in the literature and examined:
  - (i) GDP global share as proxy for size of the reserve-issuing currency (IMF-WEO).
  - (ii) Inflation as captured by annual change in CPI inflation (IMF-WEO).
  - (iii) Current account balance as percent of GDP (IMF-WEO).
  - (iv) Debt captured by central government debt to GDP (IMF FAD database).
  - (v) Trade openness as sum of exports and imports to GDP (World Bank).
  - (vi) Financial openness as sum of the reserve currency issuer external assets and liabilities as percent of GDP (updated Lane and Milesi-Ferretti (2007) database).
- Methods and data:
  - Series plotted over time; bivariate correlations displayed between relative importance measures and lagged differences of each proxy determinant.
  - Lagged variables used to help stablish some causal relationships.
  - Frankel and Wei’s approach provides longer time series; Kawai and Pontines’ approach yields shorter spans.
  - Analysis focuses on U.S. dollar bloc (Figures 9-11), euro bloc (Figures 12-14), and renminbi bloc (Figures 15-16). Results for pound and yen are in the Annex.

### A. The U.S. dollar bloc — empirical associations and persistence
- Key associations:
  - GDP global share matters for the dollar bloc, particularly over the long run (Figures 11 and 12, upper-left panels).
  - Negative relationship between inflation and size of the dollar bloc as captured by Frankel and Wei’s measure; this relationship is evident until the onset of the global financial crisis (not apparent in Kawai and Pontines’ measure).
  - Current account deficits seem positively correlated with the relative importance of the dollar bloc (Figure 12).
  - Increases in debt are negatively correlated with the size of the dollar currency bloc; this relationship strengthened following the global financial crisis, when U.S. debt jumped from roughly over 60 percent to over 100 percent.
  - Greater financial openness appears positively correlated with a stronger dollar bloc; relationship less evident for trade openness.
- Persistence:
  - Autocorrelation of the two measures of the dollar bloc is high and close to one (Figure 13), indicating high persistence (regression line near the 45-degree line).

### B. The euro bloc — empirical associations and persistence
- Caveats:
  - Euro formally introduced in 2002; historical analysis uses joint relative importance of French Franc and German Deutsche Mark pre-2002.
- Key observations:
  - Trending decline in relative importance of DM and FF accompanied by limited progress in trade and financial openness and shrinking relative economic size of Germany and France.
  - Standard macroeconomic discipline variables (lower inflation, fiscal discipline, larger current account deficits) do not appear to have supported the relative importance of the FF and DM in a relatively closed economy environment; sometimes relationships run opposite.
  - Introduction of the euro did not result in greater importance of the euro bloc; the euro gained importance only after the global financial crisis but the gain was short lived.
  - In 2010 the euro was hit by debt problems in several economies, with debt levels increasing from about 60 to over 90 percent of GDP in more recent years (Figure 14 middle-right panel).
- Persistence:
  - Economic persistence of the euro bloc is high but much less than the dollar bloc (Figure 15 and Figure 16), implying policy actions to support international role and credibility of the euro are relatively more relevant than for the dominant dollar.

*Source: Fund staff calculations and analysis as presented in the source content.*

### introduction of the euro. Lines display fitted OLS regressions.

### wp1820 - introduction of the euro. Lines display fitted OLS regressions.

### C. The renminbi bloc — findings and drivers
- The internationalization of the renminbi is a recent phenomenon.
- The increasing share of the Chinese economy in the global economy has played a key role in the increasing importance of the renminbi bloc (Figure 17 and 18).
- Current account surpluses might be negatively correlated with the expansion of the RMB bloc and therefore possibly have slowed down that expansion (Figure 18, left middle panel).
- Debt concerns in China seem to have dented the expansion of the renminbi bloc, at least for the sample period; this may have coincided with the global financial crisis and the European debt crisis, which dented the dollar and the euro blocs.
- Overall diagnostic:
  - Currency blocs benefit from network externalities and are therefore highly persistentalthough susceptible to change.
  - The reserve issuer’s economic size matters.
  - Debt considerations as a proxy for the credibility of the currency appear to be relevant, particularly following the global financial crisis.
  - There is some indication that current account surpluses may undermine a currency bloc.

### Figures 17–18 — empirical presentation (description)
- Figure 17: "Relative Importance of the Renminbi Currency Bloc vis-à-vis Proxy Determinants"
  - Plots Kawai and Potines’ measure of the relative importance of a currency bloc (red line) against proxy determinants (dashed green line).
  - Vertical line marks the start of the global financial crisis.
  - Proxy determinants shown: GDP Share (in percent), Inflation (in percent), Current Account (as percent of GDP), Debt (as percent of GDP), Trade Openness (as percent of GDP), Financial Openness (units as in source).
- Figure 18: "Relative Importance of the Renminbi Currency Blocs vis-à-vis Proxy Determinants — Simple correlations vis-à-vis difference lagged variables"
  - Diamonds in red display Kawai and Pontines’ measure of relative size of currency blocs.
  - The horizontal axis measures the change (except for inflation) of the variable lagged one period.
  - Lines display fitted OLS regressions.
  - Panel variables shown: GDP Share (in percent), Inflation (in percent), Current Account (as percent of GDP), Debt (as percent of GDP), Trade Openness (as percent of GDP), Financial Openness.

### V. CONCLUSIONS — core results and open questions
- Measurement approach:
  - The paper measures currency diversification by examining how reserve currencies influence currency fluctuations across the world and how this influence has changed over time—i.e., the extent to which national currencies are anchored to reserve currencies and become part of a reserve currency bloc.
- Key results:
  - Confirms the lack of reserve diversification in the international monetary system.
  - Within the few currencies that dominate the global landscape, the U.S. dollar appears the most dominant.
  - The estimates suggest that the RMB has gained in international influence, which is now significant, particularly among the BRICS’ countries.
  - No evidence found of an Asian RMB bloc.
  - The international monetary system’s transition from a bi-polar bloc (U.S. dollar and European or “euro” bloc) to a tri-polar currency bloc (including the renminbi bloc) is underway.
- Persistence and policy relevance:
  - The degree of influence of a currency bloc is highly persistent.
  - Policies and their credibility matter; in the case of the RMB, policies to support its international role have played a key role.
- Open questions and risks:
  - Will the renminbi bloc expand its influence?
  - Will expansion be sustained, and will it come at the expense of the U.S. dollar or other currency blocs, such as the euro?
  - Other challenges might come from new instruments, such as virtual currencies (e.g. bitcoin).

*Source: IMF-IFS, IMF WEO, Milesi-Ferretti (2007), World Bank, author calculations.*

---


_Source: https://www.imf.org/-/media/files/publications/wp/2018/wp1820.pdf_