International Monetary Trade and the Law of One Price
33 Pages Posted: 21 Dec 2014
Date Written: August 20, 2002
Abstract
We endogenize circulation of currencies and price formation in a decentralized monetary trading environment with two countries and two currencies. In equilibrium sellers of homogenous goods may post prices in the national or also in the foreign currency, given buyers' unobservable valuations. We prove that, under different monetary regimes, the absence of well integrated international goods markets don't necessarily imply a violation of the law of one price. We also illustrate the behavior of prices across regimes characterized by different degrees of monetary integration.
Keywords: search, international currency, price posting, money
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