On the Emergence of International Currencies: An Experimental Approach

We integrate theory and experimental evidence to study the emergence of different international monetary arrangements based on the circulation of two intrinsically worthless fiat currencies as media of exchange. Our framework is based on a two-country, two-currency search model where the value of each currency is jointly determined by private agents’ decisions and monetary policy formalized as changes in a country’s money growth rate. Results from the experiments indicate subjects coordinate on a regime where both currencies are accepted even when other regimes are theoretically possible. At the same time, we find the acceptance of foreign currency depends on relative inflation rates where sellers tend to reject payment with a more inflationary foreign currency. We also document the presence of learning in shaping acceptance patterns over time.