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On the Welfare Benefits of an International Currency

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Author Info
Prakash Kannan

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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 US dollar's premier international role to the euro. Building on recent advancements in the literature on search models of money, this paper presents a novel model-based approach towards assessing the welfare benefits associated with the international use of a country's currency. The welfare gain for the Euro area in having the euro internationally used ranges from 1.7% to 2.1% of consumption.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/49.

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Length: 37 pages
Date of creation: 06 Mar 2007
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Handle: RePEc:imf:imfwpa:07/49

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Keywords: International curency ; search models of money ; Currencies ; Money ; Economic models ;

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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)
  5. Wallace, Neil, 2001. "Whither Monetary Economics?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 847-69, November.
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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)
  10. Alberto Trejos & Randall Wright, 1996. "Search-theoretic models of international currency," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 117-132. [Downloadable!]
  11. Michael B. Devereux & Shouyong Shi, 2008. "Vehicle Currency," Working Papers tecipa-315, University of Toronto, Department of Economics. [Downloadable!]
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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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