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Endogenous Multiple Currencies

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  • Martin, Antoine

Abstract

In this paper I study a model in which households can decide which currency or currencies they will accept. I provide a simple set of assumptions that are sufficient to prevent the indeterminacy of the exchange rate in the sense of Kareken and Wallace (1981). In a two-country model, stable equilibria have either a single currency or national currencies. I also show currency substitution occurs as an endogenous response to high growth in the stock of a currency.

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File URL: http://dx.doi.org/10.1353/mcb.2006.0019
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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 38 (2006)
Issue (Month): 1 (February)
Pages: 245-262

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Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:1:p:245-262

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 865-90, October.
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  7. Narayana Kocherlakota & Thomas Krueger, 1999. "A Signaling Model of Multiple Currencies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 231-244, January.
  8. King, Robert G. & Wallace, Neil & Weber, Warren E., 1992. "Nonfundamental uncertainty and exchange rates," Journal of International Economics, Elsevier, vol. 32(1-2), pages 83-108, February.
  9. S.L. Schreft, 1991. "Welfare-improving credit controls," Working Paper 91-01, Federal Reserve Bank of Richmond.
  10. Sibert, Anne & Liu, Lihong, 1998. "Government finance with currency substitution," Journal of International Economics, Elsevier, vol. 44(1), pages 155-172, February.
  11. Scott Freeman & Finn E. Kydland, 1998. "Monetary aggregates and output," Working Papers 1998-013, Federal Reserve Bank of St. Louis.
  12. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
  13. Zhou, Ruilin, 1997. "Currency Exchange in a Random Search Model," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 289-310, April.
  14. Uribe, Martin, 1997. "Hysteresis in a simple model of currency substitution," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 185-202, September.
  15. Ireland, Peter N., 1994. "Economic growth, financial evolution, and the long-run behavior of velocity," Journal of Economic Dynamics and Control, Elsevier, vol. 18(3-4), pages 815-848.
  16. Boyer, Russell S. & Kingston, Geoffrey H., 1987. "Currency substitution under finance constraints," Journal of International Money and Finance, Elsevier, vol. 6(3), pages 235-250, September.
  17. Chang, Roberto, 1994. "Endogenous Currency Substitution, Inflationary Finance, and Welfare," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 903-16, November.
  18. Ravikumar, B & Wallace, Neil, 2002. "A benefit of uniform currency," MPRA Paper 22951, University Library of Munich, Germany.
  19. Kareken, John & Wallace, Neil, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 207-22, May.
  20. Ireland, Peter N, 1994. "Money and Growth: An Alternative Approach," American Economic Review, American Economic Association, vol. 84(1), pages 47-65, March.
  21. Tandon, Ajay & Wang, Yong, 1999. "Inflationary Finance, Capital Controls, and Currency Substitution," Review of International Economics, Wiley Blackwell, vol. 7(4), pages 597-612, November.
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  24. Sturzenegger, Federico, 1997. "Understanding the welfare implications of currency substitution," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 391-416.
  25. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
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Cited by:
  1. M. Salto & T. Pietra, 2013. "Welfare and excess volatility of exchange rates," Economic Theory, Springer, vol. 52(2), pages 501-529, March.
  2. Zhang, Cathy, 2013. "An Information-Based Theory of International Currency," MPRA Paper 42114, University Library of Munich, Germany.

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