Discussion Paper Details

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Title: A Model of the International Monetary System

Author(s): Emmanuel Farhi and Matteo Maggiori

Publication Date: May 2016


Programme Area(s): Economic History, Financial Economics, International Macroeconomics and Finance and Monetary Economics and Fluctuations

Abstract: We propose a simple model of the international monetary system. We study the world supply and demand for reserve assets denominated in different currencies under a variety of scenarios: a Hegemon vs. a multipolar world; abundant vs. scarce reserve assets; a gold exchange standard vs. a floating rate system; away from vs. at the zero lower bound (ZLB). We rationalize the Triffin dilemma, which posits the fundamental instability of the system, as well as the common prediction regarding the natural and beneficial emergence of a multipolar world, the Nurkse warning that a multipolar world is more unstable than a Hegemon world, and the Keynesian argument that a scarcity of reserve assets under a gold standard or at the ZLB is recessive. We show that competition among few countries in the issuance of reserve assets can have perverse effects on the total supply of reserve assets. We analyze forces that lead to the endogenous emergence of a Hegemon. Our analysis is both positive and normative.

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Bibliographic Reference

Farhi, E and Maggiori, M. 2016. 'A Model of the International Monetary System'. London, Centre for Economic Policy Research.