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A search-theoretic model of legal and illegal currency

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  • Soller Curtis, Elisabeth
  • Waller, Christopher J.

Abstract

Using a search theoretic model of money, we explore the conditions under which two currencies, domestic and foreign, will co-exist depsite legal restrictions on the use of foreign currency for internal trade. We then study how changes in government policy regarding enforcement of currency laws affects the equilibrium value of both currencies, the exchange rate and goverment seigniorage revenues. In our one country, two currency model, we show that there are multiple monetary equilibria.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 45 (2000)
Issue (Month): 1 (February)
Pages: 155-184

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Handle: RePEc:eee:moneco:v:45:y:2000:i:1:p:155-184

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Web page: http://www.elsevier.com/locate/inca/505566

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References

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  1. Camera, Gabriele, 2001. "Dirty money," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(2), pages 377-415, April.
  2. Ben R. Craig & Christopher J. Waller, 2000. "Dual-currency economies as multiple-payment systems," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 2-13.
  3. Chang, Roberto, 1994. "Endogenous Currency Substitution, Inflationary Finance, and Welfare," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 26(4), pages 903-16, November.
  4. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(4), pages 927-54, August.
  5. Kimbrough, Kent P., 1991. "Optimal taxation and inflation in an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 15(1), pages 179-196.
  6. Alberto Trejos & Randall Wright, 1996. "Search-theoretic models of international currency," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 117-132.
  7. Pitt, Mark M., 1984. "Smuggling and the black market for foreign exchange," Journal of International Economics, Elsevier, vol. 16(3-4), pages 243-257, May.
  8. Li, Victor E, 1995. "The Optimal Taxation of Fiat Money in Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 927-42, November.
  9. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(1), pages 118-41, February.
  10. Pinto, Brian, 1991. "Black markets for foreign exchange, real exchange rates and inflation," Journal of International Economics, Elsevier, vol. 30(1-2), pages 121-135, February.
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Citations

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Cited by:
  1. Martin, Antoine, 2006. "Endogenous Multiple Currencies," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(1), pages 245-262, February.
  2. Zhang, Cathy, 2013. "An Information-Based Theory of International Currency," MPRA Paper 42114, University Library of Munich, Germany.
  3. Sébastien LOTZ & Guillaume ROCHETEAU, 2000. "Launching of a New Currency in a Simple Random Matching Model," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP), Université de Lausanne, Faculté des HEC, DEEP 00.10, Université de Lausanne, Faculté des HEC, DEEP.
  4. Camera, Gabriele, 2001. "Dirty money," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(2), pages 377-415, April.
  5. Craig, Ben & Waller, C.J.Christopher J., 2004. "Dollarization and currency exchange," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(4), pages 671-689, May.
  6. Chang, Sanders S., 2006. "Inflation and dollarization in a dual-currency search-theoretic model," Economics Letters, Elsevier, vol. 92(3), pages 353-359, September.
  7. Christopher Waller, 2002. "Modeling monetary economies Bruce Champ and Scott Freeman, 2001, pp. 325," Atlantic Economic Journal, International Atlantic Economic Society, vol. 30(2), pages 213-217, June.
  8. Marchesiani, Alessandro & Senesi, Pietro, 2007. "Asymmetric government transaction policies and currencies substitutability," Economics Letters, Elsevier, vol. 97(2), pages 105-110, November.
  9. Lotz, Sebastien, 2004. "Introducing a new currency: Government policy and prices," European Economic Review, Elsevier, vol. 48(5), pages 959-982, October.
  10. Peter Rupert & Martin Schindler & Andrei Shevchenko & Randall Wright, 2000. "The search-theoretic approach to monetary economics: a primer," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 10-28.
  11. Parag Waknis, 2011. "Monetary Policy under Leviathan Currency Competition," Working papers 2011-21, University of Connecticut, Department of Economics.
  12. Dutu, Richard, 2008. "Currency interdependence and dollarization," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1673-1687, December.
  13. Craig, B. & Waller, C.J., 1999. "Currency Portfolios and Nominal Exchange Rates in a Dual Currency Search Economy," Papers, London School of Economics - Centre for Labour Economics 9916, London School of Economics - Centre for Labour Economics.
  14. Colacelli, Mariana & Blackburn, David J.H., 2009. "Secondary currency: An empirical analysis," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(3), pages 295-308, April.
  15. Ben R. Craig & Christopher J. Waller, 2000. "Dual-currency economies as multiple-payment systems," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 2-13.

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