Working Paper: NBER ID: w19537
Authors: Matthias Doepke; Martin Schneider
Abstract: We develop a theory that rationalizes the use of a dominant unit of account in an economy. Agents enter into non-contingent contracts with a variety of business partners. Trade unfolds sequentially in credit chains and is subject to random matching. By using a dominant unit of account, agents can lower their exposure to relative price risk, avoid costly default, and create more total surplus. We discuss conditions under which it is optimal to adopt circulating government paper as the dominant unit of account, and the optimal choice of “currency areas” when there is variation in the intensity of trade within and across regions.
Keywords: money; unit of account; economic theory; monetary policy
JEL Codes: E4; E5; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dominant unit of account (E42) | lower exposure to relative price risk (G19) |
| dominant unit of account (E42) | avoid costly defaults (G33) |
| dominant unit of account (E42) | create more total surplus (D69) |
| denomination of liabilities in the same unit of account as income (H60) | hedge against price fluctuations (G13) |
| hedge against price fluctuations (G13) | reduce probability of default (G33) |
| efficiency gain from adopting a dominant unit of account (E42) | depends on cost of breaking promises (D86) |
| efficiency gain from adopting a dominant unit of account (E42) | depends on presence of credit chains (E51) |
| government-issued money (E42) | dominant unit of account (E42) |