International_Money_and_Common_Currencie

International_Money_and_Common_Currencie - CEIS Tor Vergata...

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“International Money and Common Currencies in Historical Perspective” G ERALD P. D WYER AND J AMES R. L OTHIAN CEIS Tor Vergata - Research Paper Series, Vol. 3, No. 9, March 2003 This paper can be downloaded without charge from the Social Science Research Network Electronic Paper Collection: 315081 CEIS Tor Vergata R ESEARCH P APER S ERIES Working Paper No. 9 March 2003 Federal Reserve Bank of Atlanta Working Paper 2002-7
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International Money and Common Currencies in Historical Perspective Gerald P. Dwyer Jr.* Federal Reserve Bank of Atlanta James R. Lothian Fordham University March 2003 Abstract : We review the history of international monies and the theory related to their adoption and use. There are four key characteristics of these currencies: high unitary value; relatively low inflation rates for long periods; issuance by major economic and trading powers; and spontaneous, as opposed to planned, adoption internationally. The economic theory of the demand for money provides support for the importance of these characteristics. The value of a unit is arbitrary for a fiat money, but the other characteristics are likely to be important for determining any fiat money that will be the international money in the future. If the euro continues to exist for the next half century or so and has a relatively stable value, we conclude that the euro is likely to be serious competition for the dollar as the international money. JEL codes: E42, F33, N10 * Vice President, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street N.E., Atlanta, Georgia 30309, USA, tel. 1 404 498-7095, email: [email protected]; and Distinguished Professor of Finance, Schools of Business, Fordham University, 113 West 60 th Street, New York, NY 10023, USA, tel.: 1 212 636 6147; email: [email protected] We presented an earlier version of this paper at the Conference on Euro and Dollarization: Forms of Monetary Union in Integrating Regions. We thank Sven Arndt, Benjamin J. Cohen, Cesare Robotti and George von Furstenberg for comments on an earlier draft of this paper. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.
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1 1. Introduction Is the euro likely to supplant the dollar as an international money? Such a question might seem premature, especially since the euro physically has been in existence only for a few months. We are inclined to think that it is not too early to start to think about this issue seriously since the implications are large for the world’s monetary landscape. The move to a circulating euro on January 1, 2002 has been followed by little or no difficulty in the twelve countries involved. By most prognostications, moreover, the future for the new currency looks very good. That was not the case at all a decade ago, as devaluations and widened currency bands shook the Exchange Rate Mechanism (ERM). Skepticism with regard to the future of a single currency abounded among both economists and financial professionals.
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