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A model of international currency with private information

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  • Wang, Chenxi

Abstract

This paper studies a model in which nominal exchange rate is determined by asymmetric information. Within a two-country two-currency search-theoretic model, buyers have complete information, while sellers have incomplete information regarding the real value of foreign currencies in decentralized meetings. With no restrictions on which currency to use to settle transactions, sellers’ domestic currency turns out to be the preferred means of payment in equilibrium and various currency regimes emerge endogenously. The degree of information asymmetry and economic openness have ambiguous impacts on the nominal exchange rate due to the variety of currency regimes. When two countries interact in a policy game of setting inflation targets, the equilibrium inflation targets also depend on the degree of information asymmetry and economic openness, since these factors affect the seigniorage revenue and accordingly central banks’ temptation to inflate.

Suggested Citation

  • Wang, Chenxi, 2023. "A model of international currency with private information," Journal of International Money and Finance, Elsevier, vol. 131(C).
    • Handle: RePEc:eee:jimfin:v:131:y:2023:i:c:s0261560623000104
    DOI: 10.1016/j.jimonfin.2023.102809
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    More about this item

    Keywords

    International currency; Monetary search; Asymmetric information; Nominal exchange rate; Bargaining;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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