Vehicle Currencies and the Structure of International Exchange

36 Pages Posted: 3 Jan 2002 Last revised: 1 Dec 2022

See all articles by Paul R. Krugman

Paul R. Krugman

Princeton University - Princeton School of Public and International Affairs; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: April 1979

Abstract

This paper is concerned with the reasons why some currencies, such as the pound sterling and the U.S. dollar, have come to serve as "vehicles" for exchanges of other currencies. It develops a three-country model of payments equilibrium with transaction costs, and shows how one currency can emerge as an international medium of exchange. Transaction costs are then made endogenous, and it is shown how the underlying structure of payments limits, without necessarily completely determining, the choice and role of a vehicle currency. Finally, a dynamic model is developed, and the way in which one currency can displace another as the international medium of exchange is explored.

Suggested Citation

Krugman, Paul R., Vehicle Currencies and the Structure of International Exchange (April 1979). NBER Working Paper No. w0333, Available at SSRN: https://ssrn.com/abstract=260511

Paul R. Krugman (Contact Author)

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