International Trade and Currency Exchange

Helene Rey

CEP Discussion Papers from Centre for Economic Performance, LSE

Abstract: On the international scene, away from national legal rules, the use of different currencies is largely due to the process of the ''Invisible Hand''. How do currencies flow when their circulations are not tightly guided and canalised? The paper develops a three-country model of the world economy and links real trade patterns with currency exchange structures in a general equilibrium framework which includes transaction costs on foreign exchange markets. It is shown that there are in general multiple equilibrium structures of currency exchange for a given underlying real trade pattern. The existence conditions of these different equilibria are characterized, using the trade links between countries as the key parameters. An evolutionary approach to equilibrium selection is used to explain the rise and fall of international currencies as the trade flows between the three economies are altered. Finally, repercussions of the choice of a currency exchange structure on welfare are analysed.

Date: 1997-02
References: Add references at CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://cep.lse.ac.uk/pubs/download/DP0322.pdf (application/pdf)

Related works:
Journal Article: International Trade and Currency Exchange (2001)
Working Paper: International Trade and Currency Exchange (1999)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cep:cepdps:dp0322

Access Statistics for this paper

More papers in CEP Discussion Papers from Centre for Economic Performance, LSE
Bibliographic data for series maintained by ().