Currency internationalization and valuation effects: based on the threshold model

ABSTRACT

Based on the three functions of currency internationalization, including exchange medium, pricing currency and foreign reserve, this paper explores how the degree of currency internationalization affects the impact of the exchange rate and the asset price on valuation effects. Using samples of 161 countries or regions from 2001 to 2016 and the threshold regression method, we find that, firstly, there is a threshold effect of the exchange rate on valuation effects due to currency internationalization. The higher the comprehensive level of currency internationalization is, the greater the positive impact of the exchange rate on valuation effects will be. Secondly, the threshold effect of the asset price on valuation effects due to currency internationalization is not significant because of the high stickiness of asset price. Besides, compared with developed countries, currency internationalization is more important to increase valuation effects through exchange rate channel and asset price channel in developing countries or regions. Finally, there are some differences in the three types of currency internationalization functions. The promotion of exchange medium function will lead to a greater positive impact of the exchange rate on valuation effects, as well as pricing currency function. However, the foreign reserve function has no such effect.

KEYWORDS:

• Currency internationalization
• valuation effects
• exchange rate
• asset price
• threshold effect

JEL CLASSIFICATION:

• F32
• F40
• F31
• G15

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ ‘Currency mismatch’ means that the foreign liabilities of a country are mainly priced in foreign currencies, while foreign assets are priced in currency of its own. Generally speaking, the foreign liabilities of a country are mainly priced in currency of its own, while foreign assets are priced in foreign currencies.

² The author would like to thank Milesi-Ferretti for providing the latest data, which currently includes data of 215 countries from 1970 to 2016.

⁴ One hundred and sixty-one countries or regions are listed here, including Albania, Algeria, Angola, Antigua and Barbuda, Armenia, Aruba, Australia, Austria, Azerbaijan, Bahrain, Bangladesh, Barbados, Belgium, Belize, Benin, Bhutan, Bolivia, Bosnia and Herzegovina, Botswana, Brazil, Bulgaria, Burkina Faso, Burundi, Cambodia, Cameroon, Canada, Cape Verde, Central African Rep., Chad, Chile, China, P.R.: Mainland, Colombia, Comoros, Congo, Dem. Rep. of, Congo, Republic of, Costa Rica, Croatia, Cyprus, Czech Republic, Côte d’Ivoire, Denmark, Dominica, Dominican Republic, Ecuador, Egypt, El Salvador, Equatorial Guinea, Estonia, Fiji, Finland, France, Gabon, Gambia, The Georgia, Germany, Ghana, Greece, Grenada, Guatemala, Guinea, Guinea-Bissau, Guyana, Haiti, Honduras, Hong Kong of China, Hungary, Iceland, India, Indonesia, Iran, Islamic Republic of, Iraq, Ireland, Israel, Italy, Jamaica, Japan, Jordan, Kazakhstan, Kenya, Korea, Kuwait, Kyrgyz Republic, Lao People’s Dem. Rep, Latvia, Lebanon, Lesotho, Liberia, Libya, Lithuania, Macedonia, Madagascar, Malawi, Malaysia, Maldives, Mali, Malta, Mauritania, Mauritius, Mexico, Micronesia, Moldova, Mongolia, Morocco, Mozambique, Myanmar, Namibia, Nepal, Netherlands, New Zealand, Nicaragua, Niger, Nigeria, Norway, Oman, Pakistan, Panama, Paraguay, Peru, Philippines, Poland, Portugal, Qatar, Romania, Russia, Rwanda, Samoa, Saudi Arabia, Senegal, Seychelles, Sierra Leone, Singapore, Slovak Republic, Slovenia, Solomon Islands, South Africa, Spain, Sri Lanka, St. Kitts and Nevis, St. Vincent & Grens., Sudan, Suriname, Sweden, Switzerland, Tajikistan, Tanzania, Thailand, Togo, Tonga, Tunisia, Turkey, Uganda, Ukraine, United Arab Emirates, United Kingdom, United States, Uruguay, Venezuela, Rep. Bol., Vietnam, Yemen, Republic of, Zambia, Zimbabwe.

⁵ The specific test method is as follows: referring to Caner and Hansen (2004), this paper takes valuation effects (val_it) as the dependent variable, respectively, using one order lag of each other variable as its own instrumental variable, and then performs two-stage least squares (2SLS) method in turn and finally obtains the exogenous result of each variable.

⁶ The variables that have not passed the exogenous test are dealt with as follows: Referring to Caner and Hansen (2004), for pricing internationalization (Debt_it), reserve internationalization (Res_it) and price growth rate (cpi_it), respectively, using the current value of each variable as dependent variable and one order lag of the variable and other control variables as explanatory variables, we obtain the corresponding predictive values of them by using the OLS regression model.

⁷ All predictive values are represented by adding ‘N’ in front of the variable name of original variables in order to distinguish them.

⁸ According to the United Nations Human Development Report in 2010, the developed countries recognized by both the United Nations and the OECD include Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, South Korea, Netherlands, New Zealand, Norway, Poland, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States. Luxembourg and Slovakia, two other developed countries, are not included in the sample due to missing data.

⁹ Data website: https://cn.investing.com.

¹⁰ All countries and regions: Australia, Austria, Bahrain, Belgium, Botswana, Brazil, Canada, Chile, China, P.R.: Mainland, Colombia, Costa Rica, Croatia, Cyprus, Czech Republic, Denmark, Ecuador, Egypt, Estonia, Finland, France, Germany, Greece, Hong Kong of China, Hungary, Iceland, India, Indonesia, Ireland, Italy, Japan, Jordan, Kenya, Korea, Kuwait, Latvia, Lebanon, Lithuania, Malaysia, Mauritania, Morocco, Netherlands, New Zealand, Norway, Oman, Peru, Philippines, Poland, Portugal, Qatar, Romania, Saudi Arabia, Singapore, Slovak Republic, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Thailand, Tunisia, Turkey, Uganda, Ukraine, United Arab Emirates, United Kingdom, United States, Venezuela, Rep. Bol., Zambia.

Additional information

Funding

This study was supported by The Chinese National Funding of Social Sciences [grant number 19BJY008].