Network effect and international currency

Abstract

AbstractNetwork effect is an important factor for the inertia and path dependence in the international monetary system. This paper explores its influence both theoretically and empirically by (a) extending the standard monetary search model to a three‐country three‐currency model with multiple transitions to clarify the network effect on currency choices; (b) empirically showing that the network effect is positive, statistically significant, and quantitatively comparable to other factors such as trade share. The empirical results hold for (a) both major international currencies and emerging currencies such as RMB; (b) various estimation specifications and sub‐samples.This article is protected by copyright. All rights reserved.