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A benefit of uniform currency

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  • Ravikumar, B
  • Wallace, Neil

Abstract

The role of distinct currencies is studied using a random-matching model with randomized trades. The equilibrium concept is the pairwise core in meetings. We show that there exist equilibria in which home and foreign currency play distinct roles and in which the quantities of trade and output are less than the optimal quantities. The benefit of a uniform currency is the elimination of such inferior equilibria. Specifically, any equilibrium in which home and foreign currency play distinct roles is dominated in terms of ex ante welfare by the best one-currency equilibrium -- for some parameters weakly, for some strongly.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22951.

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Date of creation: Apr 2002
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Handle: RePEc:pra:mprapa:22951

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Related research

Keywords: uniform currency; random matching; pairwise core; dollarization;

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References

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  1. Mendoza, Enrique G, 2001. "The Benefits of Dollarization When Stabilization Policy Lacks Credibility and Financial Markets Are Imperfect," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 440-74, May.
  2. Balasko, Yves & Shell, Karl, 1980. "The overlapping-generations model, I: The case of pure exchange without money," Journal of Economic Theory, Elsevier, vol. 23(3), pages 281-306, December.
  3. S. Rao Aiyagari & Neil Wallace & Randall Wright, 1996. "Coexistence of money and interest-bearing securities," Working Papers 550, Federal Reserve Bank of Minneapolis.
  4. Narayana Kocherlakota & Thomas Krueger, 1999. "A Signaling Model of Multiple Currencies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 231-244, January.
  5. Manuelli, Rodolfo E & Peck, James, 1990. "Exchange Rate Volatility in an Equilibrium Asset Pricing Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 559-74, August.
  6. Kehoe, Timothy J, 2001. "Comment on Dollarization and the Integration of International Capital Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 590-96, May.
  7. Alvarez, Fernando, 2001. "Comment on The Benefits of Dollarization When Stabilization Policy Lacks Credibility and Financial Markets Are Imperfect," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 475-81, May.
  8. King, Robert G. & Wallace, Neil & Weber, Warren E., 1992. "Nonfundamental uncertainty and exchange rates," Journal of International Economics, Elsevier, vol. 32(1-2), pages 83-108, February.
  9. Christopher J. Waller & Elisabeth S. Curtis, 2003. "Currency restrictions, government transaction policies and currency exchange," Economic Theory, Springer, vol. 21(1), pages 19-42, 01.
  10. Kareken, John & Wallace, Neil, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 207-22, May.
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Citations

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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. Aleksander Berentsen & Guillaume Rocheteau & Shouyong Shi, . "Friedman Meets Hosios: Efficiency in Search Models of Money," IEW - Working Papers 154, Institute for Empirical Research in Economics - University of Zurich.
  3. Manjong Lee, 2008. "Is Uniform Money Always Better than Separate Monies?," Open Economies Review, Springer, vol. 19(1), pages 21-42, February.
  4. Alexei Deviatov & Igor Dodonov, 2006. "Exchange-rate volatility, exchange-rate disconnect, and the failure of volatility conservation," Working Papers w0079, Center for Economic and Financial Research (CEFIR).
  5. Flandreau, Marc & Jobst, Clemens, 2006. "The Empirics of International Currencies: Historical Evidence," CEPR Discussion Papers 5529, C.E.P.R. Discussion Papers.
  6. Dutu, Richard, 2008. "Currency interdependence and dollarization," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1673-1687, December.
  7. Li, Yiting & Matsui, Akihiko, 2009. "A theory of international currency: Competition and discipline," Journal of the Japanese and International Economies, Elsevier, vol. 23(4), pages 407-426, December.
  8. Elizabeth C. Wakerly & Byron G. Scott & James M. Nason, 2004. "Common trends and common cycles in Canada: who knew so much has been going on?," Working Paper 2004-5, Federal Reserve Bank of Atlanta.
  9. Warren E. Weber, 2003. "Banknote prices in the United States prior to 1860," Working Papers 629, Federal Reserve Bank of Minneapolis.
  10. Warren E. Weber, 2005. "Were U.S. state banknotes priced as securities?," Staff Report 344, Federal Reserve Bank of Minneapolis.

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