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Currency Areas and Monetary Coordination

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  • Qing Liu
  • Shouyong Shi

Abstract

We integrate a monetary search model into open-economy macro to analyze the gains from coordinating on inflation. Search frictions and local congestion lead to a determinate exchange rate between two currencies. Relative prices deviate from the law of one price. Because the deviations depend on the cross-country differential in money growth, each country is tempted to inflate to exploit the deviations. Policy coordination reduces inflation and improves welfare for all countries. In contrast to traditional models, the gains from coordination continue to exist even after each country optimally sets a direct tax on the foreign use of the country's currency. Copyright (2010) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
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Suggested Citation

  • Qing Liu & Shouyong Shi, 2005. "Currency Areas and Monetary Coordination," 2005 Meeting Papers 575, Society for Economic Dynamics.
  • Handle: RePEc:red:sed005:575
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    References listed on IDEAS

    as
    1. Head, Allen & Shi, Shouyong, 2003. "A fundamental theory of exchange rates and direct currency trades," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1555-1591, October.
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    9. Shouyong Shi, 1997. "A Divisible Search Model of Fiat Money," Econometrica, Econometric Society, vol. 65(1), pages 75-102, January.
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    14. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
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    Citations

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    Cited by:

    1. Régis Breton & Mariana Rojas Breu & Vincent Bignon, 2013. "Monetary Union, Banks and Financial Integration," Post-Print hal-01685888, HAL.
    2. Vincent Bignon & Régis Breton & Mariana Rojas Breu, 2019. "Currency Union With Or Without Banking Union," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 60(2), pages 965-1003, May.
    3. Ding, Shuze & Puzzello, Daniela, 2020. "Legal restrictions and international currencies: An experimental approach," Journal of International Economics, Elsevier, vol. 126(C).
    4. Bignon, V. & Breton, R. & Rojas Breu, M., 2013. "Currency Union with and without Banking Union," Working papers 450, Banque de France.
    5. Shouyong Shi, 2006. "Viewpoint: A microfoundation of monetary economics," Canadian Journal of Economics, Canadian Economics Association, vol. 39(3), pages 643-688, August.
    6. Benjamin Eden, 2006. "International Seigniorage Payments," Vanderbilt University Department of Economics Working Papers 0622, Vanderbilt University Department of Economics.
    7. Hakan Yilmazkuday, 2022. "Drivers of Inflation Convergence across Countries: The Role of Standard Gravity Variables," Working Papers 2211, Florida International University, Department of Economics.
    8. Li, Yiting & Matsui, Akihiko, 2009. "A theory of international currency: Competition and discipline," Journal of the Japanese and International Economies, Elsevier, vol. 23(4), pages 407-426, December.
    9. Liu, Tao & Lu, Dong & Woo, Wing Thye, 2019. "Trade, finance and international currency," Journal of Economic Behavior & Organization, Elsevier, vol. 164(C), pages 374-413.
    10. Ayman Mnasri & Beverly Lapham, 2023. "A competitive search approach to exchange rate pass-through," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 76(1), pages 153-201, July.
    11. Tao Liu & Dong Lu & Liang Wang, 2023. "Hegemony or Harmony? A Unified Framework for the International Monetary System," Working Papers 202305, University of Hawaii at Manoa, Department of Economics.
    12. Wang, Chenxi, 2023. "A model of international currency with private information," Journal of International Money and Finance, Elsevier, vol. 131(C).
    13. Zhang, Cathy, 2014. "An information-based theory of international currency," Journal of International Economics, Elsevier, vol. 93(2), pages 286-301.
    14. Shouyong Shi, 2006. "A Microfoundation of Monetary Economics," Working Papers tecipa-211, University of Toronto, Department of Economics.
    15. repec:dau:papers:123456789/12105 is not listed on IDEAS

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    More about this item

    Keywords

    Currency Area; Monetary Coordination;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory

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