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An Information-Based Theory of International Currency

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  • Zhang, Cathy

Abstract

This paper develops an information-based theory of international currency based on search frictions, private trading histories, and imperfect recognizability of assets. Using an open-economy search model with multiple competing currencies, the value of each currency is determined without requiring agents to use a particular currency to purchase a country's goods. Strategic complementarities in portfolio choices and information acquisition decisions generate multiple equilibria with different types of payment arrangements. While some inflation can benefit the country issuing an international currency, the threat of losing international status puts an inflation discipline on the issuing country. When monetary authorities interact in a simple policy game, the temptation to inflate can lead optimal policy to deviate from the Friedman rule. A calibration of the generalized model shows that for the U.S. dollar, the welfare cost of losing international status ranges from 1.3% to 2.1% of GDP per year.

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  • Zhang, Cathy, 2013. "An Information-Based Theory of International Currency," MPRA Paper 42114, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:42114
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    Cited by:

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    2. Reiss, Daniel Gersten, 2014. "Invoice Currency in Brazil," MPRA Paper 59412, University Library of Munich, Germany.
    3. Athanasios Geromichalos & Kuk Mo Jung, 2014. "An Over-the-Counter Approach to the FOREX Market," Working Papers 144, University of California, Davis, Department of Economics.
    4. Janet Hua Jiang & Cathy Zhang, 2017. "Competing Currencies in the Laboratory," Staff Working Papers 17-53, Bank of Canada.
    5. Pedro Gomis-Porqueras & Timothy Kam & Christopher Waller, 2017. "Nominal Exchange Rate Determinacy under the Threat of Currency Counterfeiting," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(2), pages 256-273, April.
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    8. Lotz, Sébastien & Zhang, Cathy, 2016. "Money and credit as means of payment: A new monetarist approach," Journal of Economic Theory, Elsevier, vol. 164(C), pages 68-100.
    9. Pedro, Gomis-Porqueras & Cathy, Zhang, 2018. "Optimal Monetary and Fiscal Policy with Migration in a Currency Union," MPRA Paper 83754, University Library of Munich, Germany.
    10. Françoise Vasselin, 2018. "The Competition Between Cash and Mobile Payments in Markets with Mobile Partnerships A Monetary Search Model Point of View," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01722404, HAL.
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    12. Liu, Tao & Lu, Dong & Zhang, Ruifeng, 2017. "Currency choice in international trade: a new monetarist approach and firm-level evidence," MPRA Paper 79149, University Library of Munich, Germany.
    13. Chao Gu & Han Han & Randall Wright, 2016. "The Effects of Monetary Policy and Other Announcements," Working Papers 1621, Department of Economics, University of Missouri.
    14. Liu, Tao, 2015. "Trade finance and international currency," MPRA Paper 64362, University Library of Munich, Germany.
    15. Lucas Herrenbrueck, 2017. "An Open-Economy Model With Money, Endogenous Search, And Heterogeneous Firms," Economic Inquiry, Western Economic Association International, vol. 55(4), pages 1648-1670, October.
    16. Waknis, Parag, 2017. "Competitive Supply of Money in a New Monetarist Model," MPRA Paper 75401, University Library of Munich, Germany.
    17. Daniel Gersten Reiss, 2015. "Invoice currency: Puzzling evidence and new questions from Brazil," Economia, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics], vol. 16(2), pages 206-225.
    18. Tanaka Mariko, 2016. "Currency Exchange in an Open-Economy Random Search Model," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 16(1), pages 1-31, January.

    More about this item

    Keywords

    international currencies; monetary search; liquidity; information frictions;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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