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A Signaling Model of Multiple Currencies

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Author Info
Narayana Kocherlakota (Federal Reserve Bank of Minneapolis)
Thomas Krueger (International Monetary Fund)

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Abstract

In this paper, we demonstrate that it may be socially optimal for countries to have different currencies, even though they have no possibility of independently controlling their money supplies. We assume that agents have heterogeneous preferences over goods of different national origin, and that these preferences are private information. We prove three results. First, for a range of parameters, it is optimal for different countries to have different currencies so that buyers can more efficiently signal their preferences over goods to sellers. Second, if it is socially optimal to have different national currencies, then it is socially optimal for sellers to sell lower quantities to buyers bearing foreign currency. Finally, it is only necessary to have two monies if cross-country trade is optimal. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1006/redy.1998.0038
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Publisher Info
Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 2 (1999)
Issue (Month): 1 (January)
Pages: 231-244
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Handle: RePEc:red:issued:v:2:y:1999:i:1:p:231-244

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Related research
Keywords: signaling; currency unions;

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Find related papers by JEL classification:
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

References listed on IDEAS
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  1. Aiyagari, S Rao & Wallace, Neil, 1991. "Existence of Steady States with Positive Consumption in the Kiyotaki-Wright Model," Review of Economic Studies, Blackwell Publishing, vol. 58(5), pages 901-16, October. [Downloadable!] (restricted)
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  2. Townsend, Robert M, 1987. "Economic Organization with Limited Communication," American Economic Review, American Economic Association, vol. 77(5), pages 954-71, December. [Downloadable!] (restricted)
  3. Kiyotaki, Nobuhiro & Wright, Randall, 1991. "A contribution to the pure theory of money," Journal of Economic Theory, Elsevier, vol. 53(2), pages 215-235, April. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Antoine Martin, 2002. "Endogenous multiple currencies," Research Working Paper RWP 02-03, Federal Reserve Bank of Kansas City. [Downloadable!]
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  2. Manjong Lee, 2008. "Is Uniform Money Always Better than Separate Monies?," Open Economies Review, Springer, vol. 19(1), pages 21-42, February. [Downloadable!] (restricted)
  3. Janet Hua, Jiang & Mei, Dong, 2008. "One or Two Monies?," MPRA Paper 14846, University Library of Munich, Germany. [Downloadable!]
  4. Jayaraman, Rajshri & Oak, Mandar, 2003. "The Signaling Role of Municipal Currencies in Local Development," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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