Hegemony or Harmony? A Unified Framework for the International Monetary System

Tao Liu (), Dong Lu () and Liang Wang ()
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Tao Liu: Central University of Finance and Economics
Dong Lu: Renmin University of China
Liang Wang: University of Hawaii Manoa

No 202305, Working Papers from University of Hawaii at Manoa, Department of Economics

Abstract: There have been two competing views on the structure of the international monetary system. One sees it as a unipolar system with a dominant currency, such as the U.S. dollar, while the other argues that multiple international currencies can coexist. Aiming to provide a unified theoretical framework to reconcile these two views, we develop a micro-founded monetary model to examine the interactions of two essential roles played by international currencies, the medium of exchange and the store of value, and highlight the importance of abundant safe asset supplies. When the two roles of international currencies reinforce each other, a unipolar equilibrium exists. However, when one currency is unable to serve as sufficient safe assets for international trade transactions, the two roles work against each other. Agents have the incentive to diversify their portfolio and we have a multipolar system. The effects of monetary policy, fiscal policy, and their combinations crucially depend on the total supply of safe assets and the relative importance of the two functions of international currencies. The structure of the international monetary system could be influenced by various policies such as monetary policy, fiscal policy, and financial sanctions. We also discuss welfare under different equilibria and the effect of financial sanctions on the dominant currency in a unipolar world.

Keywords: International; Money; Multipolar; Safe Assets; Unipolar (search for similar items in EconPapers)
JEL-codes: E42 E52 F33 F40 (search for similar items in EconPapers)
Date: 2023-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mon, nep-opm and nep-pay
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