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A Signaling Model of Multiple Currencies

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  • Narayana Kocherlakota

    (Federal Reserve Bank of Minneapolis)

  • Thomas Krueger

    (International Monetary Fund)

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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Bibliographic 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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References

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  1. Townsend, Robert M, 1987. "Economic Organization with Limited Communication," American Economic Review, American Economic Association, vol. 77(5), pages 954-71, December.
  2. Nobuhiro Kiyotaki & Randall Wright, 1989. "A contribution to the pure theory of money," Staff Report 123, Federal Reserve Bank of Minneapolis.
  3. Aiyagari, S Rao & Wallace, Neil, 1991. "Existence of Steady States with Positive Consumption in the Kiyotaki-Wright Model," Review of Economic Studies, Wiley Blackwell, vol. 58(5), pages 901-16, October.
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Cited by:
  1. Martin, Antoine, 2006. "Endogenous Multiple Currencies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 245-262, February.
  2. Rajshri Jayaraman & Mandar Oak, 2005. "The Signalling Role of Municipal Currencies in Local Development," Economica, London School of Economics and Political Science, vol. 72(288), pages 597-613, November.
  3. Manjong Lee, 2008. "Is Uniform Money Always Better than Separate Monies?," Open Economies Review, Springer, vol. 19(1), pages 21-42, February.
  4. Dong, Mei & Jiang, Janet Hua, 2010. "One or two monies?," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 439-450, May.
  5. Ravikumar, B & Wallace, Neil, 2002. "A benefit of uniform currency," MPRA Paper 22951, University Library of Munich, Germany.

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