A Model of Global Currency Pricing

This paper proposes a concept of a global currency and introduces a “global currency pricing” specification into a standard N-country open economy macroeconomic model. A global currency is defined as a virtual unit of account that is exclusively used for international trade invoicing and is formed as a basket of individual currencies, similar to the existing SDR. We show there is a unique optimal composition of a global currency that weights currencies according to their importance in international trade. A striking implication is that under this global currency design, the monetary policy of each country should be concerned solely with domestic shocks. No country should have more than a 50 percent weight in an optimal global currency, and a situation where a large country has the sole weighting in the global currency is likely to be worst outcome from a perspective of global welfare. We derive the conditions under which global currency pricing (GCP) dominates all other outcomes, and is an optimal choice of invoicing currency for individual firms.