International Monetary Trade and the Law of One Price

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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 unobservable buyers’ valuations. We prove that, under different monetary regimes, the absence of well integrated international goods markets doesn’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.


NOTICE: this is the author’s working version of a work that was accepted for publication in Journal of Monetary Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Monetary Economics, volume 50, issue 7, in 2003. DOI: 10.1016/j.jmoneco.2003.08.002

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