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A Theory of International Currency and Seigniorage Competition

Author

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  • Yiting Li

    (Department of Economics, National Twaiwan University)

  • Akihiko Matsui

    (Faculty of Economics, University of Tokyo)

Abstract

This paper explicitly considers strategic interaction between governments to study currency competition and its effects on the circulation of currencies and welfare in a two-country, two-currency search theoretic model. Each government uses seigniorage to provide public goods. Agents consume private goods, and the public goods of their own country. We have several findings. The negative impact of a country's inflationary policy on the realm of circulation of its currency imposes an inflation discipline: the more open a country is, the stronger is the discipline. The worldwide circulation of a currency increases seigniorage and welfare and decreases the inflation rate of the issuing country compared to autarky. The other country, since the tax base is reduced due to the use of foreign currency, raises its inflation rate. However, there is a limit on the rate beyond which it cannot maintain the circulation of national money. Under strategic interaction between governments in selecting equilibrium, the larger country would try to lower the inflation rate to make its currency circulate abroad, while the other country may also lower the inflation rate to sustain its national currency as the sole medium of exchange.

Suggested Citation

  • 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.
    • Handle: RePEc:tky:fseres:2005cf363
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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2005/2005cf363.pdf
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    References listed on IDEAS

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    3. Marc Flandreau & Clemens Jobst, 2006. "The Empirics of International Currencies: Evidence from the 19th Century," Sciences Po publications n°5529, Sciences Po.
    4. Marc Flandreau & Clemens Jobst, 2009. "The Empirics of International Currencies: Network Externalities, History and Persistence," Economic Journal, Royal Economic Society, vol. 119(537), pages 643-664, April.
    5. Giovanni Pittaluga & Elena Seghezza, 2012. "Euro vs Dollar: An Improbable Threat," Open Economies Review, Springer, vol. 23(1), pages 89-108, February.
    6. Seghezza, Elena & Morelli, Pierluigi, 2018. "Rule of law and balance of power sustain US dollar preeminence," Journal of Policy Modeling, Elsevier, vol. 40(1), pages 16-36.
    7. Flandreau, Marc & Jobst, Clemens, 2006. "The Empirics of International Currencies: Historical Evidence," CEPR Discussion Papers 5529, C.E.P.R. Discussion Papers.
    8. repec:hal:wpspec:info:hdl:2441/669 is not listed on IDEAS

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