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A Repeated Model of the International Monetary System without Direct Default Costs

Author

Listed:
  • Rongyu Wang

    (University of Edinburgh)

  • Tim Worrall

    (School of Economics, University of Edinburgh)

Abstract

This paper considers a repeated version of the International Monetary System model of Fahri and Maggiore (2018) without a direct default cost. Issuance of a safe asset by the Hegemon is sustained by a no-default condition that trades off the short-term benefit of default against the continuation value of not defaulting. In this model, it is optimal for the Hegemon to maintain a constant issuance. The constant issuance policy may however, be unstable. In particular, the no-default condition links current issuance to issuance in the previous period. If the Hegemon adopts a simple, but short-sighted, heuristic rule that bases current issuance on the issuance in the previous period, then the constant issuance policy is unstable. If however, the Hegemon uses a heuristic that targets the demand for risky assets from the rest of the world, then the corresponding equilibrium is stable.

Suggested Citation

  • Rongyu Wang & Tim Worrall, 2025. "A Repeated Model of the International Monetary System without Direct Default Costs," Edinburgh School of Economics Discussion Paper Series 318, Edinburgh School of Economics, University of Edinburgh.
    • Handle: RePEc:edn:esedps:318
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    References listed on IDEAS

    as
    1. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-598, May.
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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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