Working Paper: CEPR ID: DP2226
Authors: Hélène Rey
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: international currency; liquidity; exchange rate
JEL Codes: E40; F33; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| structure of currency exchange (F31) | world output (F01) |
| real trade patterns (F14) | multiple equilibrium structures of currency exchange (F31) |
| volume of trade flows (F10) | currency internationalization (F33) |
| asymmetric trade links (F12) | emergence of vehicle currencies (F31) |
| trade links between countries (F10) | equilibrium structures of currency exchange (F31) |