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A Signaling Model of Multiple Currencies

Author

Listed:
  • 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)

Suggested Citation

  • 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.
    • Handle: RePEc:red:issued:v:2:y:1999:i:1:p:231-244
    DOI: 10.1006/redy.1998.0038
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    References listed on IDEAS

    as
    1. Kiyotaki, Nobuhiro & Wright, Randall, 1991. "A contribution to the pure theory of money," Journal of Economic Theory, Elsevier, vol. 53(2), pages 215-235, April.
    2. Shi Shougong, 1995. "Money and Prices: A Model of Search and Bargaining," Journal of Economic Theory, Elsevier, vol. 67(2), pages 467-496, December.
    3. Townsend, Robert M, 1987. "Economic Organization with Limited Communication," American Economic Review, American Economic Association, vol. 77(5), pages 954-971, December.
    4. S. Rao Aiyagari & Neil Wallace, 1991. "Existence of Steady States with Positive Consumption in the Kiyotaki-Wright Model," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(5), pages 901-916.
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    Citations

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    Cited by:

    1. 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.
    2. Manjong Lee, 2008. "Is Uniform Money Always Better than Separate Monies?," Open Economies Review, Springer, vol. 19(1), pages 21-42, February.
    3. Ravikumar, B & Wallace, Neil, 2002. "A benefit of uniform currency," MPRA Paper 22951, University Library of Munich, Germany.
    4. repec:dau:papers:123456789/11496 is not listed on IDEAS
    5. Martin, Antoine, 2006. "Endogenous Multiple Currencies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 245-262, February.
    6. Dong, Mei & Jiang, Janet Hua, 2010. "One or two monies?," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 439-450, May.
    7. Hendrickson, Joshua R. & Park, Jaevin, 2021. "The case against eliminating large denomination bills," Journal of Macroeconomics, Elsevier, vol. 68(C).

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    More about this item

    Keywords

    signaling; currency unions;

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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