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International trade and currency exchange

Rey, H. (1997) International trade and currency exchange. CEPDP, 322. Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Abstract

On the international scene, away from national legal rules, the use of different currencies is largely due to the process of the ''''Invisible Hand''''. How do currencies flow when their circulations are not tightly guided and canalised? 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. It is shown that there are in general multiple equilibrium structures of currency exchange for a given underlying real trade pattern. The existence conditions of these different equilibria are characterized, using the trade links between countries as the key parameters. An evolutionary approach to equilibrium selection is used to explain the rise and fall of international currencies as the trade flows between the three economies are altered. Finally, repercussions of the choice of a currency exchange structure on welfare are analysed.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk
Additional Information: © 1997 H.Rey
Library of Congress subject classification: H Social Sciences > HF Commerce
H Social Sciences > HG Finance
Sets: Collections > Economists Online
Research centres and groups > Centre for Economic Performance (CEP)
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 322
Date Deposited: 02 Aug 2008 12:06
URL: http://eprints.lse.ac.uk/20359/

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