1997 Fiscal Year Final Research Report Summary
A Theory of International Currencies and its Microfoundation
| Project/Area Number |
08453010
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| Research Category |
Grant-in-Aid for Scientific Research (B)
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| Allocation Type | Single-year Grants |
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| Section | 一般 |
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| Research Field |
Public finance/Monetary economics
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| Research Institution | University of Tsukuba |
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Principal Investigator |
MATSUI Akihiko University of Tsukuba, Institute of Policy and Planning Sciences Associate Professor, 社会工学系, 助教授 (30272165)
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| Project Period (FY) |
1996 – 1997
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| Keywords | currency / incomplete markets / norms / trade benefits |
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| Research Abstract |
In this project, a model of international currencies is constructed. More specifically, it presents a two-country model in which two currencies compete with each other. There exists an equilibrium in which the two currencies with different rate of inflation circulate as media of exchange despite that neither currency is forced to be used for transaction. Policy games, in which the two governments simultaneously control and commit to tax rates and, possibly inflation rates, are also considered. Among other things, the Friedman rule of setting inflation rate at the level of zero nominal interest rate does not occur because of currency competition. Also, it is shown that the country with weak currency may be worse off by opening its door to a foreign country. This is contrary to one of major findings in trade theory that trade usually improves the welfare of the country.
In carrying out this project, the researcher became more and more interested in the aspect of currency circulation as a norm. A currency is circulated since people who accept it think it will be accepted by someone else later on. This fact that people accept money because other do the same thing is the very feature of social norms. Issues related to social norms are very broad, and it cannot be done within a few years. However, I hope that a new light will be shed on the issue of international currencies if we understand better about currencies as social norms.
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