Essays on international money

This dissertation studies the phenomenon of "international money". The term "international money" is multidimensional. In international trade, it is used to denote the medium of exchange used in goods transactions, while in foreign exchange markets, it is used to denote the medium of exchange used in transactions between currencies. This dissertation analyzes the theoretical linkages between international money and the composition of assets held by banks. In the data, we observe a high degree of correlation between the two. A large share of foreign currency assets held by banks is held in assets denominated in the dominant international money. This was true for the pound sterling in the early 1900s and is true for the US dollar now. In the second chapter of the dissertation, the endogenous decision of traders to transact in particular currencies is shown to influence the composition of assets held by commercial banks. Banks have an incentive to bias their holdings towards the dominant currency to minimize switching costs. A new channel of welfare loss is also identified when a country's currency loses share in international transactions due to positive externalities in the model associated with the invoicing of trade. In the third chapter, the presence of a similar form of network externality is used to explain the high degree of persistence in the use of the pound sterling to denominate trade despite the fact that Britain's share of world trade and world output had long since fallen far below the US share. In the final chapter of the dissertation, the impact of the role of a currency as a medium of exchange in the interbank foreign exchange market on the asset composition of commercial banks is studied. The main result in the chapter states that the role of a currency as a vehicle currency has no direct impact on the optimal amount of inventories held in assets denominated in that currency.