 Vehicle currency pricing and its positive welfare consequences under optimal monetary policyJapan and the World Economy, 2014, vol. 30, issue C, 75-85 Abstract: Using a two-country general equilibrium model, this paper analytically derives the possibility of positive welfare consequences of vehicle currency use in invoicing international trades. Such vehicle currency use is prominent in the data. The literature points out welfare loss under optimal monetary policy due to vehicle currency pricing relative to the flexible price equilibrium outcome, modeling only tradable goods. By introducing nontradable goods and their sector-specific productivity shocks, this paper provides a closed-form condition under which one country's welfare is higher under optimal monetary policy if its exports are invoiced with the other country's currency than if invoiced with its own currency, given that the other country's exports are invoiced with the producer's currency. That is, this paper derives a condition under which vehicle currency pricing is preferred by the nonvehicle currency country to producer currency pricing. Keywords: Nominal exchange rate; Invoicing currency; Vehicle currency; Optimal monetary policy; Nontradable goods (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:japwor:v:30:y:2014:i:c:p:75-85 DOI: 10.1016/j.japwor.2014.02.006 Access Statistics for this article Japan and the World Economy is currently edited by Robert Dekle and Yasushi Hamao More articles in Japan and the World Economy from Elsevier |
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