Liquidity Premium and International Seigniorage Payments
AbstractWhy do people hold dollar denominated assets when higher rate of return alternatives are available? Can a country collect seigniorage payments from other countries in the long run? Does the supplier of the international currency benefit from doing so? I provide qualitative answers to these related questions in terms of a model with price dispersion, heterogeneous agents and two government-backed assets (interest-bearing monies). In the steady state one of the assets is used primarily in low price transactions and earns a relatively low (measured) real rate of return. The stable demand country that issues the relatively liquid asset gets seigniorage but its welfare may be less than under autarky because trade increases the uncertainty about demand in the relevant markets and uncertainty sometimes leads to ex-post pricing mistakes and waste.
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Bibliographic InfoPaper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0901.
Date of creation: Jan 2009
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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html
Liquidity; sequential trade; international currency; currency substitution; the Friedman rule; seigniorage;
Find related papers by JEL classification:
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-01-31 (All new papers)
- NEP-DGE-2009-01-31 (Dynamic General Equilibrium)
- NEP-MAC-2009-01-31 (Macroeconomics)
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