Historically, the world payments system has been dominated by a single currency accepted in the exchange of goods and assets among countries. In recent decades, the US dollar has played this role. The dollar acts as a 'vehicle currency' in the sense that agents in non-dollar economies will...

We analyze the gain from coordinating on inflation between currency areas. To do so, we integrate a monetary search model into open-economy macro to construct a microfoundation for exchange rates. Each currency derives a value from alleviating the difficulties in trade. With a matching process...