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A Model of Global Currency Pricing

Author

Listed:
  • Michael B. Devereux
  • Rui Lu
  • Kang Shi
  • Juanyi (Jenny) Xu

Abstract

This paper proposes a concept of a global currency and introduces a “global currency pricing” specification into a standard N-country open economy macroeconomic model. A global currency is defined as a virtual unit of account that is exclusively used for international trade invoicing and is formed as a basket of individual currencies, similar to the existing SDR. We show there is a unique optimal composition of a global currency that weights currencies according to their importance in international trade. A striking implication is that under this global currency design, the monetary policy of each country should be concerned solely with domestic shocks. No country should have more than a 50 percent weight in an optimal global currency, and a situation where a large country has the sole weighting in the global currency is likely to be worst outcome from a perspective of global welfare. We derive the conditions under which global currency pricing (GCP) dominates all other outcomes, and is an optimal choice of invoicing currency for individual firms.

Suggested Citation

  • Michael B. Devereux & Rui Lu & Kang Shi & Juanyi (Jenny) Xu, 2025. "A Model of Global Currency Pricing," NBER Working Papers 33540, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33540
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    More about this item

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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