Confidence in Domestic Money and Currency Substitution
AbstractThis article studies currency substitution in a model where domestic money suffers from lack of confidence. When agents' confidence is exogenous and constant, there is a unique but unstable dual-money steady state. However, when agents' confidence is updated endogenously, the dynamics of currency substitution are driven by agents' evolving beliefs, and the economy always converges to an equilibrium where both monies circulate. Therefore, the economy under endogenous beliefs exhibits both persistence in currency substitution and tenacity of domestic money. Furthermore, in general, there are multiple steady states, which can be Pareto ranked by the degree of currency substitution. (JEL E41, F30, G11) Copyright 2003, Oxford University Press.
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Bibliographic InfoArticle provided by Western Economic Association International in its journal Economic Inquiry.
Volume (Year): 41 (2003)
Issue (Month): 3 (July)
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Find related papers by JEL classification:
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
- F30 - International Economics - - International Finance - - - General
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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- Kyriakos C. Neanidis & Christos S. Savva, 2006.
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0609, Economics, The University of Manchester.
- K C Neanidis & C S Savva, 2006. "The Effects of Uncertainty on Currency Substitution and Inflation: Evidence from Emerging Economies," Centre for Growth and Business Cycle Research Discussion Paper Series 71, Economics, The Univeristy of Manchester.
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- Yoskowitz, David W. & Pisani, Michael J., 2007. "Risk and reward: Currency substitution and acceptance of the Mexican peso by firms in the United States southern frontier," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(3), pages 422-434, July.
- Valev, Neven T., 2010. "The hysteresis of currency substitution: Currency risk vs. network externalities," Journal of International Money and Finance, Elsevier, vol. 29(2), pages 224-235, March.
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