Currency

About: Currency is a research topic. Over the lifetime, 26697 publications have been published within this topic receiving 485370 citations. The topic is also known as: monetary unit & unit of money.

The Emergence of the Euro as an International Currency

Abstract: We propose a new analytical basis for discussing the potential international role of the euro and offer specific estimates of its consequences Previous work on the costs and benefits of a European international reserve currency (eg, Alogoskoufis and Portes 1991, 1992, 1997) has considered many issues: seigniorage, benefits for "home" financial institutions, relaxation of the "external constraint" on macroeconomic policy, the role of the region in international institutions, effects on macroeconomic policy coordination, and the wider consequences of exercising or sharing "currency hegemony" Here we assess whether the euro will take on this role, we measure the effects of alternative scenarios on welfare in the main world regions, and we consider European policy options We stress developments in financial asset markets, and we use a new model and new data to evaluate scenarios As euro securities markets become deeper and more liquid and transactions costs fall, euro assets will become more attractive, and the use of the euro as a vehicle currency will expand; the two effects interact The welfare analysis reveals potential benefits for the euro area, of the same order of magnitude as international seigniorage - at the cost of the US and the "Asian bloc"

A Theory of the Currency Denomination of International Trade

Abstract: Nominal rigidities due to menu costs have become a standard element in closed economy macroeconomic modelling. The 'New Open Economy Macroeconomics' literature has investigated the implications of nominal rigidities in an open economy context and found that the currency in which prices are set has significant macroeconomic and policy implications. In this paper we solve for the optimal invoicing choice by integrating this micoeconomic decision at the firm level into a general equilibrium open economy model. Strategic interactions between firms play a critical role in the analysis. We find that the less competition firms face in foreign markets, as reflected in market share and product differentiation, the more likely they will price in their own currency. We also show that when a set of countries forms a monetary union, the new currency is likely to be used more extensively in trade than the sum of the currencies it replaces. JEL Classification: F31, F41

Quantifying International Capital Mobility in the 1980s

Abstract: The Feldstein-Horioka finding, that national saving and investment have been highly correlated in the past, has not been primarily due to econometric problems such as endogenous fiscal policy; it has held up equally well when instrumental variables are used. But the inflow of capital to the United States has been so large in recent years that an updating of the sample period to 1987 produces a coefficient on national saving that is lower than in past studies. This decline in the degree of crowding out of investment can be attributed to the increased degree of financial market integration in the 1980s. Capital controls and other bathers to the movement of capital across national borders remained for such countries as the United Kingdom and Japan as recently as 1979, and France and Italy as recently as 1986. But a new data set of forward exchange rates for 25 countries shows that a continuing worldwide trend of integration of financial markets in the 1980s had all but eliminated short-term interest differentials for major industrialized countries by 1988. It is only the country premium that has been eliminated however, this means that only covered interest differentials are small. Nominal and real exchange rate variability remain, and indeed were larger in the 1980s than in the 1970s. The result is that a currency premium remains, consisting of an exchange risk premium plus expected real currency depreciation. The popular null hypothesis that expected real depreciation is constant at zero is tested, and rejected, with a 119-year sample. (Post-1973 data sets do not allow enough observations to provide a useful test of this null hypothesis.) The existence of expected real depreciation means that, even if interest rates are equalized internationally when expressed in a common currency, large differentials in j interest rates remain. Investors have no incentive to arbitrage away such differentials. Because there is no force tying the domestic real interest rate to the world real interest rate, it follows that there is no reason to expect any country's shortfalls of national saving to be completely financed by borrowing from abroad.