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Endogenous multiple currencies

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  • Antoine Martin

Abstract

I study a model of multiple currencies in which sellers can choose the currency they will accept. I provide conditions that are necessary and sufficient to avoid indeterminacy of the exchange rate. Under these assumptions, all stable equilibria have the property that all sellers in the same country accept the same currency. Thus stable equilibria are either single currency or national currencies equilibria. I also show that currency substitution occurs as an endogenous response to high growth in the stock of a currency.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 02-03.

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Date of creation: 2002
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Handle: RePEc:fip:fedkrw:rwp02-03

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Keywords: Money ; Currency substitution;

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  1. Finn E. Kydland & Scott Freeman, 2000. "Monetary Aggregates and Output," American Economic Review, American Economic Association, vol. 90(5), pages 1125-1135, December.
  2. Russell Cooper & Hubert Kempf, 2000. "Designing stabilization policy in a monetary union," Working Paper 0001, Federal Reserve Bank of Cleveland.
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  4. 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.
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  8. Martin Uribe, 1995. "Hysteresis in a simple model of currency substitution," International Finance Discussion Papers 509, Board of Governors of the Federal Reserve System (U.S.).
  9. S.L. Schreft, 1991. "Welfare-improving credit controls," Working Paper 91-01, Federal Reserve Bank of Richmond.
  10. Lihong Liu & Anne Sibert, 1996. "Government Finance with Currency Substitution," Archive Discussion Papers 9609, Birkbeck, Department of Economics, Mathematics & Statistics.
  11. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
  12. Akihiko Matsui, 1998. "Strong Currency and Weak Currency," CIRJE F-Series CIRJE-F-14, CIRJE, Faculty of Economics, University of Tokyo.
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  14. Minford, Patrick, 1995. "Other people's money: Cash-in-advance microfoundations for optimal currency areas," Journal of International Money and Finance, Elsevier, vol. 14(3), pages 427-440, June.
  15. Zhou, Ruilin, 1997. "Currency Exchange in a Random Search Model," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 289-310, April.
  16. 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.
  17. Ravikumar, B & Wallace, Neil, 2002. "A benefit of uniform currency," MPRA Paper 22951, University Library of Munich, Germany.
  18. 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.
  19. 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.
  20. 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.
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  22. Sturzenegger, Federico, 1997. "Understanding the welfare implications of currency substitution," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 391-416.
  23. 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.
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  25. 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.
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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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