Monetary Policy under Leviathan Currency Competition
AbstractIn this paper, we use a dual currency Lagos-Wright model to explore the nature of optimal monetary policy under currency competition using different timing protocols. The central banks are utility maximizing players. To characterize equilibrium with reputation, we model the centralized market sub period of the Lagos-Wright economy as an infinitely repeated game between the two Leviathan central banks (long run players) and a continuum of competitive agents (short run players). Concentrating on Markov strategies in such a game shows that the Markov perfect equilibrium features highest inflation tax. However, allowing for reputation concerns improves the inflation outcome. Such a game typically features multiple equilibriums but the competition between the banks allows the use of renegotiation proof-ness as an equilibrium selection mechanism. Accordingly, equilibrium featuring the lowest inflation tax is weakly renegotiation proof, suggesting that better inflation outcome is more likely in the case of Leviathan currency competition than in the single Leviathan bank case.
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Bibliographic InfoPaper provided by University of Connecticut, Department of Economics in its series Working papers with number 2011-21.
Length: 28 pages
Date of creation: Oct 2011
Date of revision:
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More information through EDIRC
Monetary policy; currency competition; Leviathan; inflation tax; money search;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-01 (All new papers)
- NEP-CBA-2011-11-01 (Central Banking)
- NEP-DGE-2011-11-01 (Dynamic General Equilibrium)
- NEP-MAC-2011-11-01 (Macroeconomics)
- NEP-MON-2011-11-01 (Monetary Economics)
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