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Currency restrictions, government transaction policies and currency exchange

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  • Christopher J. Waller
  • Elisabeth S. Curtis

Abstract

We study how currency restrictions and government transaction policies affect the values of fiat currencies in a two country, divisible good, search model. We show that these policies can generate equilibria where both currencies circulate as medium of exchange and where currency exchange occurs between citizens of different countries. Restrictions on the internal use of foreign currency can cause the domestic currency to be relatively more valuable to domestic agents while taxes on domestic currency create an incentive for home agents to hold foreign currency. We demonstrate that some policies increase prices and lower welfare while others do the reverse. Copyright Springer-Verlag Berlin Heidelberg 2003

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File URL: http://hdl.handle.net/10.1007/s00199-002-0271-1
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 21 (2003)
Issue (Month): 1 (01)
Pages: 19-42

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Handle: RePEc:spr:joecth:v:21:y:2003:i:1:p:19-42

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Web page: http://link.springer.de/link/service/journals/00199/index.htm

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Related research

Keywords: Keywords and Phrases: Search; Money; Currency exchange.; JEL Classification Numbers: E4; E5; F3.;

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Cited by:
  1. Craig, Ben & Waller, C.J.Christopher J., 2004. "Dollarization and currency exchange," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 671-689, May.
  2. Waller, Christopher Jude & Craig, Ben R., 2001. "Currency Portfolios and Currency Exchange in a Search Economy," Discussion Paper Series 1: Economic Studies 2001,15, Deutsche Bundesbank, Research Centre.
  3. Yiting Li & Akihiko Matsui, 2005. "A Theory of International Currency and Seigniorage Competition," CARF F-Series CARF-F-041, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
  4. Lotz, Sebastien, 2004. "Introducing a new currency: Government policy and prices," European Economic Review, Elsevier, vol. 48(5), pages 959-982, October.
  5. Li, Yiting & Matsui, Akihiko, 2009. "A theory of international currency: Competition and discipline," Journal of the Japanese and International Economies, Elsevier, vol. 23(4), pages 407-426, December.
  6. Marchesiani, Alessandro & Senesi, Pietro, 2007. "Asymmetric government transaction policies and currencies substitutability," Economics Letters, Elsevier, vol. 97(2), pages 105-110, November.
  7. Ravikumar, B & Wallace, Neil, 2002. "A benefit of uniform currency," MPRA Paper 22951, University Library of Munich, Germany.
  8. Yiting Li & Akihiko Matsui, 2005. "A Theory of International Currency and Seigniorage Competition," CIRJE F-Series CIRJE-F-363, CIRJE, Faculty of Economics, University of Tokyo.
  9. Zhang, Cathy, 2013. "An Information-Based Theory of International Currency," MPRA Paper 42114, University Library of Munich, Germany.

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