Theoretical Aspects of National Currencies’ Internationalization
International Monetary Systems and settlements in national currencies
The modern world economy is characterized by an unparalleled level of financial services markets’ development, increase in cross-border investment flows as well as integration of national and regional capital markets. Investors are able to move huge amount of funds swiftly from one country to another in search of the highest returns or "safe havens" for periods of increased turbulence.
Financial globalization is deeply affecting the functioning of national financial systems. International capital flows’ fluctuations may have a powerful impact on national markets. They could lead to dramatic increases or decreases in assets values, exchange rates and stock market indices. Rising volume of international transactions creates additional challenges for regulators. It complicates the task of achieving targeted inflation parameters, GDP growth and desired level of interest rates.
Th e reasons for drastic changes in capital flows and high volatility in financial markets lie in the fact that the modern global financial system is based on the US dollar serving as the world currency. Most companies use the USD as an intermediate currency for transactions with counterparties from foreign countries. According to SWIFT, 40.7% of international settlements are made in the USD while the United States’ share in world trade in goods and services does not exceed 12% (Figure 1).
Th e USD serves as a transmission mechanism of the US Federal Reserve’s monetary policy on the global economy and financial markets. Th us, heavy reliance on the dollar in international settlements significantly impairs the EMDEs’ monetary authorities’ ability to counter external shocks and to achieve desirable targets of national monetary policy.
Th e FED’s interventions have led to diverse changes in global capital flows. They were directed to emerging markets as well as developing economies during the periods of easing the United States’ monetary policy and provided them with excessive and cheaper liquidity. However, the tightening periods have had the opposite effect and provoked sharp and painful capital outflows resulting in emerging currencies’ depreciation, financial fluctuation and economic output decrease. Combating the GFC, the FED resorted to unconventional MP tools dubbed "Quantitative Easing". A number
of studies have recently showed that the series of QE’s (1–3) have significantly increased the FED’s influence on the global financial system (Gilchrist, Yue, Zakrajsek, 2014)
