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Currency competition in a fundamental model of money

  • Camera, Gabriele
  • Craig, Ben
  • Waller, Christopher J.

The authors study how two fiat monies, one safe and one risky, compete in a decentralized trading environment. The equilibrium value of the two currencies, their transaction velocities and agents' spending patterns are endogenously determined. The authors derive conditions under which agents holding diversified currency portfolios spend the safe currency first and hold the risky one for later purchases. They also examine when the reverse spending pattern is optimal.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 64 (2004)
Issue (Month): 2 (December)
Pages: 521-544

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Handle: RePEc:eee:inecon:v:64:y:2004:i:2:p:521-544
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  1. 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.
  2. S. Rao Aiyagari & Neil Wallace & Randall Wright, 1996. "Coexistence of money and interest-bearing securities," Working Papers 550, Federal Reserve Bank of Minneapolis.
  3. Lihong Liu & Anne Sibert, 1996. "Government Finance with Currency Substitution," Archive Discussion Papers 9609, Birkbeck, Department of Economics, Mathematics & Statistics.
  4. Head, Allen & Shi, Shouyong, 2003. "A fundamental theory of exchange rates and direct currency trades," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1555-1591, October.
  5. Camera, Gabriele & Corbae, Dean, 1999. "Money and Price Dispersion," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(4), pages 985-1008, November.
  6. Waller, Christopher Jude & Craig, Ben R., 2001. "Currency Portfolios and Currency Exchange in a Search Economy," Discussion Paper Series 1: Economic Studies 2001,15, Deutsche Bundesbank, Research Centre.
  7. Engineer, Merwan, 2000. "Currency transactions costs and competing fiat currencies," Journal of International Economics, Elsevier, vol. 52(1), pages 113-136, October.
  8. Martin Uribe, 1995. "Hysteresis in a simple model of currency substitution," International Finance Discussion Papers 509, Board of Governors of the Federal Reserve System (U.S.).
  9. Chang, Roberto, 1989. "Endogenous Currency Substitution, Inflationary Finance, And Welfare," Working Papers 89-12, C.V. Starr Center for Applied Economics, New York University.
  10. 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.
  11. 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.
  12. Ruilin Zhou, 1997. "Currency Exchange in a Random Search Model," Review of Economic Studies, Oxford University Press, vol. 64(2), pages 289-310.
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