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Economic Geography and a Theory of International Currency: Implications of a Random Matching Model

Author

Listed:
  • Shin-ichi Fukuda

    (Faculty of Economics, The University of Tokyo)

  • Mariko Tanaka

    (Musashino University)

Abstract

This paper presents a new theory that may explain why the US dollar is the dominant medium of exchange in international transactions. Unlike previous studies, we investigate a model in which economic geography affects the international currency choice. The model is based on a random matching model in which agents trade with foreign agents using a specific currency. We consider a world that consists of two regions, the EU and the USA, each of which has different active time zones. In local transactions, matched agents use their local currency. However, in international transactions, sellers choose either the Euro or the US dollar as the invoice currency to maximize their expected discounted utility. We show that under some reasonable conditions, the US dollar becomes the unique international currency, even if each region is symmetric in all ways except for their locations. Further, when the US dollar is used for international transactions, the expected discounted utility becomes higher in the US than in the EU in the steady-state equilibrium.

Suggested Citation

  • Shin-ichi Fukuda & Mariko Tanaka, 2022. "Economic Geography and a Theory of International Currency: Implications of a Random Matching Model," CIRJE F-Series CIRJE-F-1184, CIRJE, Faculty of Economics, University of Tokyo.
    • Handle: RePEc:tky:fseres:2022cf1184
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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2022/2022cf1184.pdf
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    References listed on IDEAS

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