An equilibrium model of the international price system

Dmitry Mukhin

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: What explains the central role of the dollar in world trade? Will the US currency retain its dominant status in the future? This paper develops a quantitative general equilibrium framework with endogenous currency choice that can address these questions. Complementarities in price setting and input-output linkages across firms generate complementarities in currency choice making exporters coordinate on the same currency of invoicing. The dollar is more likely to play this role because of the large size of the US economy, a widespread peg to the dollar, and the history dependence in currency choice. Calibrated using the world input-output tables and exchange rate moments, the model can successfully replicate the key empirical facts about the use of currencies at the global level, across countries, and over time. According to the counterfactual analysis, the peg to the dollar in other economies ensures that the US currency is unlikely to lose its global status because of the falling US share in the world economy, but can be replaced by the renminbi in case of a negative shock in the US economy. If the peg is abandoned, the world is likely to move to a new equilibrium with multiple regional currencies.

JEL-codes: D21 E31 E42 F14 F31 F33 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2022-02-01
New Economics Papers: this item is included in nep-ban, nep-int, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Published in American Economic Review, 1, February, 2022, 112(2), pp. 650 - 688. ISSN: 0002-8282

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