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A Search Theoretic Model of Legal and Illegal Currency

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Author Info

  • Soller, E.V.
  • Waller, C.

Abstract

Using a search theoretic model of money, we explore the conditions under which two currencies, domestic and foreign, will co-exist depsite legal restrictions on the use of foreign currency for internal trade. We then study how changes in government policy regarding enforcement of currency laws affects the equilibrium value of both currencies, the exchange rate and goverment seigniorage revenues. In our one country, two currency model, we show that there are multiple monetary equilibria.

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Bibliographic Info

Paper provided by Indiana - Center for Econometric Model Research in its series Papers with number 97-003.

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Length: 36 pages
Date of creation: 1997
Date of revision:
Handle: RePEc:fth:indian:97-003

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Postal: Indiana University, Center for Econometric Model Research, Department of Economics; Bloomington, IN 47405.
Phone: 812-855-1021
Fax: 812-855-3736
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Web page: http://www.indiana.edu/~econweb/
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Keywords: CURRENCIES ; EXCHANGE RATE ; MODELS;

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References

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  1. 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.
  2. Alberto Trejos & Randall Wright, 1996. "Search-theoretic models of international currency," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 117-132.
  3. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 118-41, February.
  4. Ben R. Craig & Christopher J. Waller, 2000. "Dual-currency economies as multiple-payment systems," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 2-13.
  5. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
  6. Kimbrough, Kent P., 1991. "Optimal taxation and inflation in an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 15(1), pages 179-196.
  7. Li, Victor E, 1995. "The Optimal Taxation of Fiat Money in Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 927-42, November.
  8. Camera, Gabriele, 2001. "Dirty money," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 377-415, April.
  9. Pinto, Brian, 1991. "Black markets for foreign exchange, real exchange rates and inflation," Journal of International Economics, Elsevier, vol. 30(1-2), pages 121-135, February.
  10. Pitt, Mark M., 1984. "Smuggling and the black market for foreign exchange," Journal of International Economics, Elsevier, vol. 16(3-4), pages 243-257, May.
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Citations

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Cited by:
  1. Christopher Waller, 2002. "Modeling monetary economies Bruce Champ and Scott Freeman, 2001, pp. 325," Atlantic Economic Journal, International Atlantic Economic Society, vol. 30(2), pages 213-217, June.
  2. Chang, Sanders S., 2006. "Inflation and dollarization in a dual-currency search-theoretic model," Economics Letters, Elsevier, vol. 92(3), pages 353-359, September.
  3. Lotz, Sebastien, 2004. "Introducing a new currency: Government policy and prices," European Economic Review, Elsevier, vol. 48(5), pages 959-982, October.
  4. Sebastien Lotz & Guillaume Rocheteau, 2000. "Launching of a New Currency in a Simple Random Matching Model," Econometric Society World Congress 2000 Contributed Papers 0720, Econometric Society.
  5. Zhang, Cathy, 2013. "An Information-Based Theory of International Currency," MPRA Paper 42114, University Library of Munich, Germany.
  6. Marchesiani, Alessandro & Senesi, Pietro, 2007. "Asymmetric government transaction policies and currencies substitutability," Economics Letters, Elsevier, vol. 97(2), pages 105-110, November.
  7. Antoine Martin, 2002. "Endogenous multiple currencies," Research Working Paper RWP 02-03, Federal Reserve Bank of Kansas City.
  8. Craig, B. & Waller, C.J., 1999. "Currency Portfolios and Nominal Exchange Rates in a Dual Currency Search Economy," Papers 9916, London School of Economics - Centre for Labour Economics.
  9. Dutu, Richard, 2008. "Currency interdependence and dollarization," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1673-1687, December.
  10. Peter Rupert & Martin Schindler & Andrei Shevchenko & Randall Wright, 2000. "The search-theoretic approach to monetary economics: a primer," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 10-28.
  11. Colacelli, Mariana & Blackburn, David J.H., 2009. "Secondary currency: An empirical analysis," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 295-308, April.
  12. Parag Waknis, 2011. "Monetary Policy under Leviathan Currency Competition," Working papers 2011-21, University of Connecticut, Department of Economics.
  13. Ben R. Craig & Christopher J. Waller, 2000. "Dual-currency economies as multiple-payment systems," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 2-13.
  14. Camera, Gabriele, 2001. "Dirty money," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 377-415, April.
  15. Craig, Ben & Waller, C.J.Christopher J., 2004. "Dollarization and currency exchange," Journal of Monetary Economics, Elsevier, vol. 51(4), pages 671-689, May.

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