Why Do Different Countries Use Different Currencies?

22 Pages Posted: 15 Feb 2006  

Narayana Kocherlakota

University of Minnesota - Twin Cities - Department of Economics

Thomas M. Krueger

University of Wisconsin - La Crosse

Date Written: February 1998

Abstract

During long periods of history, countries have pegged their currencies to an international standard (such as gold or the U.S. dollar), severely restricting their ability to create money and affect output, prices, or government revenue. Nevertheless, countries generally have maintained their own currencies. The paper presents a model where agents have heterogeneous preferencesthat are private informationover goods of different national origin. In this environment, it may be optimal for countries to have different currencies; we also identify conditions where separate national currencies do not expand the set of optimal allocations. Implications for a currency union in Europe are discussed.

Keywords: money, random matching, heterogenous preferences, currency union, EMU

JEL Classification: E40, E42, F33, D82

Suggested Citation

Kocherlakota, Narayana and Krueger, Thomas M., Why Do Different Countries Use Different Currencies? (February 1998). IMF Working Paper, Vol. , pp. 1-22, 1998. Available at SSRN: https://ssrn.com/abstract=882242

Narayana Kocherlakota (Contact Author)

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States
612-625-5318 (Phone)
612-624-0209 (Fax)

HOME PAGE: http://www.econ.umn.edu/~nkocher/

Thomas M. Krueger

University of Wisconsin - La Crosse ( email )

1725 State Street
La Crosse, WI 54601
United States

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