China's Dominance Hypothesis and the Emergence of a Tri-polar Global Currency System

Abstract

This study assesses whether the international monetary system is already tri-polar by testing what we call China's ‘dominance hypothesis’, i.e. whether the renminbi already influences exchange rate and monetary policies strongly in Asia, a direct reference to the old ‘German dominance hypothesis’ which ascribed to the German mark a dominant role in Europe in the 1980s. Using a global factor model of exchange rates and a complementary event study, we find evidence that the renminbi has become a key driver of currency movements in Asia since the mid-2000s, especially since the global financial crisis, in line with China's dominance hypothesis.