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Vehicle Currencies And the Structure Of International Exchange

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  • Paul R. Krugman

Abstract

This paper is concerned with the reasons why some currencies, such as the pound sterling and the U.S. dollar, have come to serve as "vehicles" for exchanges of other currencies. It develops a three-country model of payments equilibrium with transaction costs, and shows how one currency can emerge as an international medium of exchange. Transaction costs are then made endogenous, and it is shown how the underlying structure of payments limits, without necessarily completely determining, the choice and role of a vehicle currency. Finally, a dynamic model is developed, and the way in which one currency can displace another as the international medium of exchange is explored.

Suggested Citation

  • Paul R. Krugman, 1979. "Vehicle Currencies And the Structure Of International Exchange," NBER Working Papers 0333, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0333
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    References listed on IDEAS

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    1. Jones, Robert A, 1976. "The Origin and Development of Media of Exchange," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 757-775, August.
    2. Chrystal, K Alec, 1977. "Demand for International Media of Exchange," American Economic Review, American Economic Association, vol. 67(5), pages 840-850, December.
    3. Niehans, Jurg, 1969. "Money in a Static Theory of Optimal Payment Arrangements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(4), pages 706-726, November.
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