International Trade and Currency Exchange

Helene Rey

No 2226, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: On the international scene, away from national legal rules, the use of different currencies is largely due to the operation of the 'Invisible Hand'. 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. In the presence of strategic complementarities, there are multiple equilibrium structures of currency exchange for a given underlying real trade pattern. The existence conditions of these different equilibria are characterised, using the trade links between countries as the key parameters. Finally, repercussions of the choice of a currency exchange structure on world output are analysed.

Keywords: Exchange Rate; International Currency; Liquidity (search for similar items in EconPapers)
JEL-codes: E40 F33 F41 (search for similar items in EconPapers)
Date: 1999-09
References: Add references at CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: International Trade and Currency Exchange (2001)
Working Paper: International Trade and Currency Exchange (1997)
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