Why Do Different Countries Use Different Currencies?
22 Pages Posted: 15 Feb 2006
Date Written: February 1998
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: Suggested Citation