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Launching of a New Currency in a Simple Random Matching Model

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Author Info
Sébastien LOTZ
Guillaume ROCHETEAU

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Abstract

This paper studies the launching of a new fiat currency within a search-theoretic framework. We show that legal tender laws may not be sufficient to guarantee the acceptability of the new currency, and that the withdrawal of a large fraction of the competing currency is essential to avoid the failure of such a launching. The possibility of converting the old currency into the new one can ease the transition to the new currency only if it is combined with strict legal tender laws. Finally, a network externality is identified that may generate inefficiencies in the conversion decision.

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Publisher Info
Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 00.10.

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Length: 46 pages
Date of creation: May 2000
Date of revision:
Publication status: Published in Journal of Money Credit and Banking, vol.34 (3), part 1, 2002, pp. 563-588
Handle: RePEc:lau:crdeep:00.10

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.65
Web page: http://www.hec.unil.ch/deep/publications-english/e-cahiers.htm

For technical questions regarding this item, or to correct its listing, contact: (Claudine Delapierre Saudan).

Related research
Keywords: money; search; currency reform; legal tender laws;

Other versions of this item:

Find related papers by JEL classification:
E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information

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References listed on IDEAS
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  1. Soller Curtis, Elisabeth & Waller, Christopher J., 2000. "A search-theoretic model of legal and illegal currency," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 155-184, February. [Downloadable!] (restricted)
    Other versions:
  2. Edward J. Green & Warren Weber, 1996. "Will the New $100 Bill Decrease Counterfeiting?," Macroeconomics 9609003, EconWPA, revised 11 Sep 1996. [Downloadable!]
    Other versions:
  3. François R. Velde & Warren E. Weber & Randall Wright, 1999. "A Model of Commodity Money, with Applications to Gresham's Law and the Debasement Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 291-323, January. [Downloadable!] (restricted)
    Other versions:
  4. Caskey, John P & St Laurent, Simon, 1994. "The Susan B. Anthony Dollar and the Theory of Coin/Note Substitutions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 495-510, August. [Downloadable!] (restricted)
  5. Selgin, George A, 1994. "On Ensuring the Acceptability of a New Fiat Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 808-26, November. [Downloadable!] (restricted)
  6. Aiyagari, S. Rao & Wallace, Neil, 1997. "Government Transaction Policy, the Medium of Exchange, and Welfare," Journal of Economic Theory, Elsevier, vol. 74(1), pages 1-18, May. [Downloadable!] (restricted)
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  7. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March. [Downloadable!] (restricted)
  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.
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  9. Alberto Trejos & Randall Wright, 1996. "Search-theoretic models of international currency," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 117-132. [Downloadable!]
  10. Joseph Farrell & Garth Saloner, 1985. "Installed Base and Compatibility With Implications for Product Preannouncements," Working papers 385, Massachusetts Institute of Technology (MIT), Department of Economics.
    Other versions:
  11. 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. [Downloadable!]
  12. Kiyotaki, Nobuhiro & Wright, Randall, 1991. "A contribution to the pure theory of money," Journal of Economic Theory, Elsevier, vol. 53(2), pages 215-235, April. [Downloadable!] (restricted)
    Other versions:
  13. Craig, Ben, 1999. "Comment on Inside and Outside Money as Alternative Media of Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 458-60, August.
  14. Li, Yiting & Wright, Randall, 1998. "Government Transaction Policy, Media of Exchange, and Prices," Journal of Economic Theory, Elsevier, vol. 81(2), pages 290-313, August. [Downloadable!] (restricted)
  15. Jovanovic, Boyan & Rosenthal, Robert W., 1988. "Anonymous sequential games," Journal of Mathematical Economics, Elsevier, vol. 17(1), pages 77-87, February. [Downloadable!] (restricted)
    Other versions:
  16. Richard K. Abrams & Hernán Cortés Douglas, 1993. "Introduction of a New National Currency: Policy, Institutional, and Technical Issues," IMF Working Papers 93/49, International Monetary Fund.
  17. Wright, Randall, 1999. "Comment on Inside and Outside Money as Alternative Media of Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 461-68, August.
  18. Ritter, Joseph A, 1995. "The Transition from Barter to Fiat Money," American Economic Review, American Economic Association, vol. 85(1), pages 134-49, March. [Downloadable!] (restricted)
  19. Berentsen, Aleksander, 1998. "Monetary Policy Implications of Digital Money," Kyklos, Blackwell Publishing, vol. 51(1), pages 89-117.
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