International Trade and Currency Exchange

On the international scene, away from national legal rules, the use of different currencies is largely due to the process of the ''Invisible Hand''. How do currencies flow when their circulations are not tightly guided and canalised? The paper develops a three-country model of the world economy and links real trade patterns with currency exchange structures in a general equilibrium framework which includes transaction costs on foreign exchange markets. It is shown that there are in general multiple equilibrium structures of currency exchange for a given underlying real trade pattern. The existence conditions of these different equilibria are characterized, using the trade links between countries as the key parameters. An evolutionary approach to equilibrium selection is used to explain the rise and fall of international currencies as the trade flows between the three economies are altered. Finally, repercussions of the choice of a currency exchange structure on welfare are analysed.

[1]  Hendrik Bessembinder,et al.  Bid-ask spreads in the interbank foreign exchange markets☆ , 1994 .

[2]  Ruilin Zhou.  Currency Exchange in a Random Search Model , 1997 .

[3]  N. Kiyotaki,et al.  Production and consumption , 2013 .

[4]  M. Friedman,et al.  A Monetary History of the United States , 1963 .

[5]  Lawrence H. Officer,et al.  Money in International Exchange: The Convertible Currency System. , 1979 .

[6]  Hélène Rey,et al.  The Emergence of the Euro as an International Currency , 1998 .

[7]  A. Matsui,et al.  Toward a Theory of International Currency , 1993 .

[8]  A. Matsui.  Strong Currency and Weak Currency , 1998 .

[9]  R. Mckinnon,et al.  Money in international exchange , 1979 .

[10]  Golden Fetters: The Gold Standard and the Great Depression, 1919-1939 , 1992 .

[11]  Stanley W. Black.  Transactions Costs and Vehicle Currencies , 1989, SSRN Electronic Journal.

[12]  Shouyong Shi,et al.  A Divisible Search Model of Fiat Money , 1997 .

[13]  J. Kremers,et al.  Establishing a central bank: issues in Europe and lessons from the US: European Monetary Union and international currencies in a tripolar world , 1992 .

[14]  B. Cohen.  The future of sterling as an international currency , 1971 .

[15]  Peter A. Diamond,et al.  Money in search equilibrium , 1984 .

[16]  P. Krugman.  The International Role of the Dollar: Theory and Prospect , 1984 .

[17]  Marco Pagano,et al.  Trading Volume and Asset Liquidity , 1989 .

[18]  A. Maddison,et al.  Monitoring the world economy, 1820-1992 , 1995 .

[19]  P. Krugman,et al.  Vehicle Currencies and the Structure of International Exchange , 1979 .

[20]  N. Roubini,et al.  Liquidity, capital controls, and exchange rates , 1993 .

[21]  Anna J. Schwartz,et al.  A Monetary History of the United States, 1867-1960. , 1964 .

[22]  Michael D. Bordo,et al.  Golden fetters: The gold standard and the great depression : Barry Eichengreen, (Oxford University Press, New York, 1992) pp. xix + 448, $39.95 , 1994 .

[23]  Philipp Hartmann.  Currency Competition and Foreign Exchange Markets: The Dollar, the Yen and the Euro , 1998 .

[24]  Sven Grassman.  A fundamental symmetry in international payment patterns , 1973 .

[25]  Robert E. Lucas,et al.  Liquidity and interest rates , 1990 .

[26]  M. Hellwig.  The Challenge of Monetary Theory , 1993 .