Central Bank Swap Lines and Currency Internationalization in Trade

Abstract

Internationalization of emerging market currencies, especially the Renminbi (RMB), is of great interest to both academic and policy worlds. This paper investigates the role of central-bank local currency swap lines in promoting the use of local currencies in trade invoicing. While the existing literature has emphasized the direct role of swap lines in trade invoicing, we suggest an indirect role of risk reduction. Using exporter-trading partner-year level data on currency invoicing from South Korea during 2006-2019, we show that signing swap lines between Korea and China has likely played a role in a rise of the RMB in the invoicing share among Korean exporters. Conversely, the expiration of a swap line between Korea and Japan has likely played a role in a decline in the Japanese Yen’s invoicing share. Cross-firm heterogeneity helps with our identification. In particular, those Korean exporting firms whose main banks had more pre-swap line branch exposure to China exhibit a more pronounced increment in RMB invoicing share. In addition, Korean banks raised the interest rates on RMB deposits but lowered those on JPY deposits. In our theory, the financial safety net afforded by the swap line incentivizes banks to provide higher interest rates for deposits in the partner’s currency, and hence promotes the use of the same currency in trade invoicing.