Munich Personal RePEc Archive

A benefit of uniform currency

Ravikumar, B and Wallace, Neil (2002): A benefit of uniform currency.

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The role of distinct currencies is studied using a random-matching model with randomized trades. The equilibrium concept is the pairwise core in meetings. We show that there exist equilibria in which home and foreign currency play distinct roles and in which the quantities of trade and output are less than the optimal quantities. The benefit of a uniform currency is the elimination of such inferior equilibria. Specifically, any equilibrium in which home and foreign currency play distinct roles is dominated in terms of ex ante welfare by the best one-currency equilibrium -- for some parameters weakly, for some strongly.

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