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Currency Development Through Liquidity Provision

Author

Listed:
  • Antonio Coppola
  • Arvind Krishnamurthy
  • Chenzi Xu

Abstract

Drawing on the experiences of the historical Eurodollar market and recent Chinese dollar bond issuances traded outside U.S. jurisdiction at negative spreads to Treasurys, we examine the conditions under which a parallel offshore dollar financial system that circumvents Western sanctions may emerge. We propose a model in which currency use is driven by liquidity provision and safe bond supply. We characterize three equilibrium regimes: high convenience yields emerge in both the initial sanctions-driven region and the final liquidity-driven region, separated by an intermediate region. Transitions between equilibria depend on safe-asset supply and liquidity technologies, in addition to endogenous dynamic complementarities.

Suggested Citation

  • Antonio Coppola & Arvind Krishnamurthy & Chenzi Xu, 2025. "Currency Development Through Liquidity Provision," NBER Working Papers 33390, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33390
    Note: DAE IFM POL
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    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-

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