Vehicle Currencies And the Structure Of International Exchange

Paul Krugman

No 333, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper is concerned with the reasons why some currencies, such as the pound sterling and the U.S. dollar, have come to serve as "vehicles" for exchanges of other currencies. It develops a three-country model of payments equilibrium with transaction costs, and shows how one currency can emerge as an international medium of exchange. Transaction costs are then made endogenous, and it is shown how the underlying structure of payments limits, without necessarily completely determining, the choice and role of a vehicle currency. Finally, a dynamic model is developed, and the way in which one currency can displace another as the international medium of exchange is explored.

Date: 1979-04
Note: ITI IFM
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Citations: View citations in EconPapers (6)

Published as Journal of Money, Credit and Banking, Vol. 12, no. 3 (1980): 513-526.

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