Volatility of the Exchange Rate after Renminbi Inclusion into the SDR：Test of Stability and Representation

• Published in: China economist (Beijing, China) Vol. 11; no. 3; pp. 77 - 90
• Main Author: 丁剑平 向坚 蔚立柱
• Format: Journal Article
• Language: English
• Published: Beijing Institute of Industrial Economics, Chinese Academy of Social Sciences 01.05.2016
• Subjects: American dollar; Central banks; Commodity prices; Currency; Dollar standard; Economic conditions; Externality; Foreign exchange markets; Foreign exchange rates; Global economy; International trade; Recessions; Renminbi; Reserve assets; Special drawing rights; Volatility
• ISSN: 1673-8837

The special drawing rights （SDR） must have stability and representation in order to serve as reserve assets and the unit of account for bulk commodities and assume the function as a potential international currency. By introducing such factors as China＇s share in global trade volume in 2013, this paper found that the covariance between the SDR and the price ftuctuations of major commodities is the smallest after Renminbi inclusion into the SDR. The covariance is more or less halved compared with the SDR without Renminbi. Then, based on our comparison of volatility in the effective exchange rates （EER） of various countries （extensively used） and the volatility in the SDR exchange rate （seldom used）, we found that despite similar trend curves, the SDR＇s volatility can explain for a very small part of the volatility in effective exchange rate. The residual error indicates that the share of SDR is limited in the volatility of effective exchange rates of various countries on the one hand and suggests that it is urgent to expand the SDR to include representative currencies, particularly the currencies that represent significant weights of world trade. Relevant tests demonstrate that Renminbi inclusion into the SDR will not only enlarge the stability of SDR but enlarge its function as an index currency through the extension of SDR＇s function as the unit of account for major world commodities and the inclusion of the currencies of other major trading nations, so that the representation as the global unit of account will be enlarged. In addition, the inclusion into the SDR also helps Renminbi become a component of the international reserve currencies and supplement its liquidity supply.