National Currencies in International Settlements: Main Mechanisms

Abstract

I consider the change in the standard mechanism for international settlements when the transition to settlements in national currencies happens. We assume settlements in national currencies as a bilateral foreign exchange market without the use of the banking system of a third country. This functioning should not be confused with the choice of the trade contracts currency, the reserve currency, or the currency of domestic banking products. In the case of the effective functioning of bilateral foreign exchange markets and the possibility of arbitrage transactions, the transition to settlements in national currencies does not affect the exchange rate or monetary indicators. With an imbalance in bilateral cash flows, market mechanisms (e.g exchange rate fluctuations) prevent the systematic accumulation of foreign financial assets on the balance sheet of the banking system of one of the countries. In addition, there are quasi-market schemes in the foreign trade, which involve the accumulation of foreign financial assets on the balance sheets of specialised banking institutions.