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Sorry for the general nature of the question but I find it difficult to wrap my head around the idea of a global currency.

Let's say there existed a single global currency which was not controlled by a centralized entity. All countries use this currency as their national currency. Let's also assume there exists some mechanism by which countries can come to a consensus about changes to the global monetary system (money supply, interest rates, etc).

My question is, is there a way to achieve price stability in such a system? Would trade get in the way of the ability to achieve price stability, since the price of goods/services is different in each country?

Excuse me if I am getting major concepts wrong. I am new to economics but extremely interested in this problem.

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  • $\begingroup$ Hi! What exactly do you mean when you write the currency is not controlled by a centralized entity? $\endgroup$
    – Giskard
    Oct 5, 2022 at 8:36
  • $\begingroup$ @Giskard I mean that various banks within different countries would all vote on changes to monetary policy (but not fiscal policy since that's country by country) $\endgroup$
    – jojeyh
    Oct 5, 2022 at 13:20

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To be honest, I do not see the connection of the title with the question body because you ask about inflation, rather than the impact on trade (you mention trade, but in the context of price stability).

Paul Krugman's The Return of Depression Economics and the Crisis of 2008 has, in my opinion, the best layman's explanation for the impacts of a single currency. I highly recommend this book if you are extremely interested in this problem (or (monetary) economics in general).

Krugman explains this with a fictional currency called globo. A quick summary:

  • Businessmen in particular like this system because they could buy and sell anywhere with a minimum of hassle
  • Careful management of the currency could prevent a boom-bust cycle for the world as a whole, but not for each country (also applies to regions within countries, but usually to a lesser extent because of the same language, free movement of labour etc).

The other article I recommend reading is optimum currency area. Since shocks would be very different in different countries (some may grow, others shrink), prices and wages and /or factor (labor) mobility must be very flexible for a country to regain competitiveness. A country (region) can either decrease prices relative to other countries, or workers leave the country where the unemployment rate is high to take jobs elsewhere. That way, the unemployment rate in that country decreases back to normal. In summery, even under a fixed exchange rate, countries can adjust their real exchange rate in the medium run but these adjustments may take longer and be more painful compared to flexible exchange rates with independent monetary policy.

Either way, I am not sure how you define price stability? If you mean low inflation, that is rather unrelated to trade but mainly a subject of economic activity relative to money in circulation.

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  • $\begingroup$ Thanks for the answer so much! I already found OCA and I'll get Krugman's book, seems like what I'm looking for. $\endgroup$
    – jojeyh
    Oct 5, 2022 at 13:19

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