A Model of Global Currency Pricing

Michael Devereux, Rui Lu, Kang Shi and Juanyi (Jenny) Xu

No 33540, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper proposes a concept of a global currency and introduces a “global currency pricing” (GCP) specification into a standard N-country open economy macroeconomic model. A global currency is defined as a virtual unit of account that is exclusively used for international trade invoicing and is formed as a basket of individual currencies, similar to the existing SDR. We describe the pattern of exchange rate pass-through and real allocations under a global currency and derive optimal monetary policies under each specification. We show there is a unique welfare optimal composition of a global currency that weights currencies according to their importance in international trade. A striking implication is that under this global currency design, the monetary policy of each country should be concerned solely with domestic shocks. No country should have more than a 50 percent weight in an optimal global currency. The optimal configuration of the global currency applies whether or not there is international policy cooperation. Applying the model to a sample of 20 world countries and currencies, we find that all countries can gain in welfare from a shift out of dollar currency pricing (DCP) to GCP.

JEL-codes: F30 F40 (search for similar items in EconPapers)
Date: 2025-03
New Economics Papers: this item is included in nep-ifn, nep-mon and nep-opm
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