An Information-Based Theory of International Currency

Cathy Zhang

MPRA Paper from University Library of Munich, Germany

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.

Keywords: international currencies; monetary search; liquidity; information frictions (search for similar items in EconPapers)
JEL-codes: E4 E42 (search for similar items in EconPapers)
Date: 2013-10-18
New Economics Papers: this item is included in nep-cba, nep-cta, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: An information-based theory of international currency (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:42114

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