| Summary: | 碩士 === 輔仁大學 === 經濟學研究所 === 101 === As the development of international trade, government-issued currencies circulate more wildly among countries and compete with each other in the international monetary system. The U.S. dollar is one of the most important payment instruments in the global economy, but other currencies, such as the Euro and the RMB, might achieve international status and compete with the U.S. dollar.
Zhang (2013) mentioned that monetary policy and governments' transaction strategies would affect the values of these currencies and their competition in international monetary system. In this paper, we further discuss that country uses its monetary policy to expand the size of the government sector, thereby affecting people's choice of payment instruments and the value of currency circulation.
Our article is based on monetary search model to analyze the topic. We assume that monetary policy affects the size of the government sector, and the higher the country's money supply, the greater the size of the government sector. When people meet government frequently, the value of domestic currency circulation will be higher. In addition, increased money supply will cause inflation rate increased too, and inflation reduces the value of the currency, which means, there are two effect caused by monetary policy.
When the first effect is greater than the second effect, the value of domestic currency increased; conversely, when the first effect is small, then the value of the domestic currency will decrease.
We observe that when money supply increase slightly, government size growth makes domestic currency more valuable, and this promotes it to become an international currency.
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