This paper, for the first time, analyses the role of economic, technical, and geopolitical factors in interlinking of payment systems across 117 countries, using new data on fast payment links from 2016 to 2023. We test whether links are governed by standard gravity variables influencing international trade patterns, technical features or by instead—or in addition—geopolitical factors. While we find support for the role of economic factors and technical features, the most striking finding is the strength of geopolitical effects. Our estimates suggests that the reduction in the probability of payment links between geopolitically distant countries is as much as thrice stronger than for geographically distant ones. Instrumental variable estimates suggest that the effect is causal. The results are in line with the hypothesis that alignment in country-preferences on sensitive features of contractual agreements long with incentives associated with higher opportunity costs of war emphasized in recent theoretical models play key roles in the establishment of interlinking arrangements.
Arnaud Mehl is adviser in the International Policy Analysis Division of the European Central Bank (ECB), CEPR research fellow and lecturer at Sciences Po. Arnaud has worked at the ECB since 2001 in various areas and, prior to the ECB, for the French Treasury and Edmond de Rothschild Asset Management. He is a member of the editorial board of the ECB working paper series, an associate editor of the Journal of International Money and Finance and a research associate at the globalization institute of the Dallas Fed. Arnaud’s main fields of research are open-economy macroeconomics, international finance and economic history. His work has been published in the Journal of Finance, the Journal of Monetary Economics, the Economic Journal, the Journal of International Economics, the Journal of Development Economics and Economic Policy, among others. He is the co-author of How Global Currencies Work (Princeton University Press) with Barry Eichengreen and Livia Chiţu. Arnaud holds a PhD in economics from Université Paris-Dauphine, Master's degrees from Sciences-Po and ESCP Business School and is a former visiting student of St Antony’s college, Oxford.
