NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Vehicle Currencies And the Structure Of International Exchange

Paul R. Krugman

NBER Working Paper No. 333
Issued in April 1979
NBER Program(s):   ITI   IFM

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.

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Document Object Identifier (DOI): 10.3386/w0333

Published: Journal of Money, Credit and Banking, Vol. 12, no. 3 (1980): 513-526. citation courtesy of

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