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Volatility of the Exchange Rate after Renminbi Inclusion into the SDR: Test of Stability and Representation
Ding Jianping , Xiang Jian and Yu Lizhu
Shanghai University of Finance and Economics, Shanghai Institute of International Finance Center, Shanghai, China
Abstract: The special drawing rights (SDR) must have stability and representation in
order to serve as reserve assets and the unit of account for bulk commodities and assume
the function as a potential international currency. By introducing such factors as China’s
share in global trade volume in 2013, this paper found that the covariance between the SDR
and the price fluctuations of major commodities is the smallest after Renminbi inclusion into
the SDR. The covariance is more or less halved compared with the SDR without Renminbi.
Then, based on our comparison of volatility in the effective exchange rates (EER) of various
countries (extensively used) and the volatility in the SDR exchange rate (seldom used), we
found that despite similar trend curves, the SDR’s volatility can explain for a very small
part of the volatility in effective exchange rate. The residual error indicates that the share
of SDR is limited in the volatility of effective exchange rates of various countries on the one
hand and suggests that it is urgent to expand the SDR to include representative currencies,
particularly the currencies that represent significant weights of world trade. Relevant tests
demonstrate that Renminbi inclusion into the SDR will not only enlarge the stability of
SDR but enlarge its function as an index currency through the extension of SDR’s function
as the unit of account for major world commodities and the inclusion of the currencies of
other major trading nations, so that the representation as the global unit of account will be
enlarged. In addition, the inclusion into the SDR also helps Renminbi become a component
of the international reserve currencies and supplement its liquidity supply.
Keywords: SDR, Renminbi, function of international currency, stability and representation
JEL Classification: F33
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