# What quantifiable factors contribute to the globalization of a currency?

Things that come to mind: Size of the economy of the issuing country, size of population of the issuing country, military power( quantified as defense budget) and country's share in world trade.

• Given that you mention size of the economy and military power, and ask which is more important, you might be interested in an article by Barry Eichengreen called Mars or Mercury: the international geopolitics of currencies which discusses this question. In general all of Eichengreen's writings and the many references he cites could be of interest to you. He is one of the top academic experts on global currencies. – noob2 Jan 21 at 5:58
• Deliverability and lack of controls on the capital account are also relevant. – user42108 Jan 21 at 14:05
• @user42108 I might have a little bit of a trouble in actually "quantifying" deliverability and lack of controls. So I might have to start with a simple model in which all of the currencies have the same deliverability and lack of control. You think "deliverability" could be measured by the number of offshore clearinghouses for the currency? – Mike Cocos Jan 21 at 18:19
• You can simply have a binary variable for deliverable or not. Any EM FX product guide should note which currencies are/aren't. – user42108 Jan 22 at 12:48

Open Markets, Contract Law And An Efficient Legal System

Many places that are unimportant by the population/economy/military size have global currencies. The key is that they tend to have efficient, transparent legal systems and a clear base of contract law. Both the Singapore dollar and the Hong Kong dollar are global currencies, for example, while currencies for the two biggest populations in the world (India and China) are not.

It also helps to have a local advantage in this regard. For example the Dutch guilder was never really a global currency before the Euro came around, because the European slots for that role were dominated by bigger countries like Britain, France and Germany.

Edit/Appendix:

To elaborate a bit further, one important prerequisite for some currency $$G$$ to be "global" is that there be demand for trades between $$G$$ and a variety of other currencies. That demand really takes off when companies whose native currencies are $$A$$ and $$B$$ want to do business. Neither one may be comfortable setting up transactions in the other's country and/or currency, so $$G$$ provides a mutually acceptable compromise. We then get lots of transactions between $$G$$ and other currencies.

• Brian. thank you so much for the detailed answer. Am I wrong when I say that there are countries who hold renminbi in their FX reserves? data.imf.org/regular.aspx?key=41175 – Mike Cocos Jan 21 at 18:12
• Also what I meant by "global" is that that currency is used as a currency reserves of some other countries. – Mike Cocos Jan 21 at 19:00
• "currency ... used as a currency reserves of some other countries". That is the traditional definition, but keep in mind that private holdings of foreign assets (and liabs.) have increased enormously in recent decade, so that aspect is becoming very important as well. – noob2 Jan 22 at 14:33