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Network effect and international currency

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  • Tao Liu
  • Xiaosong Wang
  • Wing Thye Woo

Abstract

The network effect is an important factor for the inertia and path dependence in the international monetary system. In this paper, we explore its influence, both theoretically and empirically: (a) by extending the standard monetary search model to a three‐country three‐currency model with multiple transitions to clarify the network effect on currency choices; (b) by showing empirically that the network effect is positive, statistically significant, and quantitatively comparable with other factors, such as trade share. The empirical results hold both for major international currencies and emerging currencies, such as RMB, and for various estimation specifications and subsamples.

Suggested Citation

  • Tao Liu & Xiaosong Wang & Wing Thye Woo, 2024. "Network effect and international currency," Scandinavian Journal of Economics, Wiley Blackwell, vol. 126(3), pages 600-626, July.
    • Handle: RePEc:bla:scandj:v:126:y:2024:i:3:p:600-626
    DOI: 10.1111/sjoe.12554
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    References listed on IDEAS

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