MACRO: On the Emergence of an International Currency; Professor Cathy ZHANG (Purdue University)

Abstract

We integrate theory and experimental evidence  to study the emergence of different international monetary arrangements based on the circulation of two intrinsically worthless fiat currencies as media of exchange. Our framework is based a simple two-country, two-currency  search model where the value of each currency is jointly determined from private agents' decisions and   monetary policy formalized as changes in a country's money growth rate. We interpret the dynamics of acceptance patterns and inflation from the laboratory through the lens of an evolutionary learning model and show how the emergence of international currency depends on monetary policy and relative inflation rates.