Monetary Definition, Exchange-Rate Determination, and a Pathway toward Global Monetary Integration: World Currency

Abstract

This research initiative on “World Currency,” based on my original concept, began in the year of 1995 and was formally proposed and submit as a research paper, during the year in 2003-2004 as part of the MSc Economics Project at HKUST. The definition of money and the determination of exchange rates have long been central concerns in macroeconomics. This formation and evolution of monetary institutions, together with the pricing of currencies, have contributed significantly to the development of modern monetary economics. Nevertheless, despite the extensive use of theoretical assumptions and formal models, economists have found it difficult to derive a single, empirically reliable measure of a currency’s “fundamental” or fair exchange rate. The market values of major international currencies fluctuate continuously, and these movements cannot always be explained by conventional monetary or exchange-rate theories. Foreignexchange markets are driven by enormous financial flows: trading in major currencies amounts to trillions of monetary units each day [1-7]. Yet exchange-rate determination depends not only on transaction volume. It also reflects expectations, market sentiment, portfolio allocation, policy intervention, and the strategic behaviour of major participants, including the central banks, G7 economies and large hedge funds. The extent to which such actors can influence exchange rates remains an important theoretical and empirical question. This paper proposes a conceptual pathway model for analyzing global monetary integration. It examines how monetary formation mechanisms influence currency values and how monetary structures are organized. The central argument is that a currency’s value has both internal and external dimensions. These may include foreign-exchange reserves, natural resources, technological capacity, national economic strength, institutional credibility, and public confidence.