International Trade and Currency Exchange
AbstractOn 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.
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Bibliographic InfoPaper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0322.
Date of creation: Feb 1997
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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP
Other versions of this item:
- E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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