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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- 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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- Fullerton, Thomas M., Jr. & Molina, Angel L., Jr. & Pisani, Michael J., 2009. "Peso Acceptance Patterns in El Paso," MPRA Paper 17900, University Library of Munich, Germany, revised 19 Jun 2009.
- 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.
- Aysen Arac & Funda Telatar & Erdinc Telatar, 2012. "Investigating the Time Varying Nature of the Link between Inflation and Currency Substitution in the Turkish Economy," Hacettepe University Department of Economics Working Papers 20122, Hacettepe University, Department of Economics.
- 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.
- Kyriakos C. Neanidis & Christos S. Savva, 2006. "The Effects of Uncertainty on Currency Substitution and Inflation: Evidence from Emerging Economies," The School of Economics Discussion Paper Series 0609, Economics, The University of Manchester.
- 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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