International trade and currency exchange

On the international scene, away from national legal rules, the use of diff erent currencies is largely due to the operation of the "Invisible Hand". T he paper develops a three-country model of the world economy. This links re al trade patterns with currency exchange structures in a general equilibriu m framework which includes transaction costs on foreign exchange markets. I n the presence of strategic complementarities, there are multiple equilibri um structures of currency exchange for a given underlying real trade patter n. The existence conditions of these different equilibria are characterized . using the trade links between countries as the key parameters. Finally, r epercussions on world output of the choice of a currency exchange structure are analysed.