THESIS
2020
viii, 70 pages : illustrations ; 30 cm
Abstract
This paper provides a theory on the endogenous formation of an International Monetary System (IMS). The baseline model of IMS in this paper builds upon the work of
Gopinath and Stein (2018) and incorporates both a notion of heterogeneous Economic
Distance between the emerging markets (EM) and the hegemons, and a heterogeneous
debt underwriting cost borne by the EMs when issuing foreign debts. The motivation
behind introducing these mechanisms is to help the original model match more closely
with the empirical regularity that different EMs share heterogenous geographical distance
and institutional closedness with the hegemons, which implies that they trade with the
hegemons with varied intensities (Bergstrand, 1985), and are expected to have different
hegemon currency invoicing s...[
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This paper provides a theory on the endogenous formation of an International Monetary System (IMS). The baseline model of IMS in this paper builds upon the work of
Gopinath and Stein (2018) and incorporates both a notion of heterogeneous Economic
Distance between the emerging markets (EM) and the hegemons, and a heterogeneous
debt underwriting cost borne by the EMs when issuing foreign debts. The motivation
behind introducing these mechanisms is to help the original model match more closely
with the empirical regularity that different EMs share heterogenous geographical distance
and institutional closedness with the hegemons, which implies that they trade with the
hegemons with varied intensities (Bergstrand, 1985), and are expected to have different
hegemon currency invoicing shares (Ito and Chinn, 2014). Using the baseline model, I am
also able to show that the parameter space sustaining different kinds of equilibria should
have been much narrower. Furthermore, it turns out that the EM agents generally prefer
an asymmetric USD dominant IMS over a symmetric IMS, but the same might not apply
to the Euro bloc EMs that share a strong economic tie with the Eurozone. Nevertheless,
this general preference for an asymmetric IMS might no longer hold when the baseline
model is extended to incorporate the possibility of a Triffin-like confidence crisis pioneered by Farhi and Maggiori (2017). Faced with little competition, the hegemon under
an asymmetric equilibrium tends to over-issue debts inside the instability zone. This
brings them higher expected welfare at the expense of opening up the possibility of a
confidence crisis, making the emerging markets worse off under an unstable asymmetric
IMS, as compared with a stable symmetric IMS.
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