Societal Benefit of Multiple Currencies

This paper presents a new reason why countries may want to keep separate currencies rather than form a currency union. In a search model of a two-country world, keeping multiple currencies with trade restrictions that favor the use of the domestic currency in domestic goods markets is socially beneficial relative to forming a currency union or letting multiple currencies circulate in all countries without restrictions. Multiple currencies improve the allocation of liquidity in the presence of trading frictions that make the use of currencies necessary to exchange commodities.