No abstract

At the macro-level, whether US dollar (USD) spillover could sustain the prosperity and stability of international economic and financial systems should become a key basis for judging the rationality of the current USD standard international monetary system. As the main contributor to USD liquidity externalities, US Treasury securities have long been favored by major economies worldwide due to their perceived safety and reliability, and their yield should be a key indicator for measuring the effect of USD liquidity spillover and the rationality of the international monetary system. However, the discussion in previous studies concerning the efficiency of holding US Treasury securities on the microeconomic level is insufficient. This study considers the negative externality of asset allocation behavior when analyzing its rationality at the macro-level. According to the empirical results, we find a clear negative relationship between the efficiency and the risk of USD assets and the holding scale of USD foreign exchange reserves. This finding indicates the dilemma faced by major economies in managing international liquidity without a sound replacement for USD assets. We argue that the current USD standard monetary system needs to be reformed and diversified to optimize the benefit of liquidity holdings globally. An internationalized RMB could play a more important role on the global and regional stages in strengthening and reforming the current monetary ecosystem.