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Discussion Paper Details

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Title: International Trade and Currency Exchange

Author(s): Hélène Rey

Publication Date: September 1999

Keyword(s): Exchange Rate, International Currency and Liquidity

Programme Area(s): International Macroeconomics and International Trade and Regional Economics

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.

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Bibliographic Reference

Rey, H. 1999. 'International Trade and Currency Exchange'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2226