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On the welfare benefits of an international currency

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Author Info
Kannan, Prakash

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Abstract

Is it beneficial for a country's currency to be used internationally? And, if so, can we quantify the benefit? Since the emergence of the euro, there has been great interest in the consequences of a transfer of the dollar's premier international role to the euro. This paper presents a novel model-based approach towards assessing the welfare benefits associated with the international use of a country's currency. Apart from the familiar benefits associated with seigniorage, residents of the issuing country experience an increase in the purchasing power of their currency both at home and abroad. In the calibration exercise carried out in this paper, we find the benefits of an international currency to be quantitatively significant. The welfare gain for the Euro area in having the euro internationally used ranges from 1.9% to 2.3% of consumption depending on relative inflation rates. The rest of the world is not indifferent as to which currency circulates as the dominant international currency. Conditional on their currency not being used internationally, their preference is for the dominant international currency to be the one with the lowest inflation rate.

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Publisher Info
Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 53 (2009)
Issue (Month): 5 (July)
Pages: 588-606
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Handle: RePEc:eee:eecrev:v:53:y:2009:i:5:p:588-606

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Keywords: International currency Search models of money;

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References listed on IDEAS
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  2. Philipp Hartmann, 1997. "Does Reuters Spreads Reflect Currencies Differences in Global Trading Activity?," FMG Discussion Papers dp265, Financial Markets Group. [Downloadable!] (restricted)
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  3. Richard Portes & Hélène Rey, 1998. "The emergence of the euro as an international currency," Economic Policy, CEPR, CES, MSH, vol. 13(26), pages 305-343, 04. [Downloadable!] (restricted)
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  4. Grassman, Sven, 1973. "A fundamental symmetry in international payment patterns," Journal of International Economics, Elsevier, vol. 3(2), pages 105-116, May. [Downloadable!] (restricted)
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  7. Bacchetta, Philippe & van Wincoop, Eric, 2005. "A theory of the currency denomination of international trade," Journal of International Economics, Elsevier, vol. 67(2), pages 295-319, December. [Downloadable!] (restricted)
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  8. Rey, Helene, 2001. "International Trade and Currency Exchange," Review of Economic Studies, Blackwell Publishing, vol. 68(2), pages 443-64, April.
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  9. Dowd, Kevin & Greenaway, David, 1993. "Currency Competition, Network Externalities and Switching Costs: Towards an Alternative View of Optimum Currency Areas," Economic Journal, Royal Economic Society, vol. 103(420), pages 1180-89, September. [Downloadable!] (restricted)
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  12. Barry Eichengreen, 2005. "Sterling's Past, Dollar's Future: Historical Perspectives on Reserve Currency Competition," NBER Working Papers 11336, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Linda S. Goldberg & Cedric Tille, 2005. "Vehicle Currency Use in International Trade," NBER Working Papers 11127, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Paul R. Krugman, 1984. "The International Role of the Dollar: Theory and Prospect," NBER Chapters, in: Exchange Rate Theory and Practice, pages 261-278 National Bureau of Economic Research, Inc. [Downloadable!]
  15. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
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