A search-theoretic model of legal and illegal currency
Using a search theoretic model of money, we explore the conditions under which two currencies, domestic and foreign, will co-exist depsite legal restrictions on the use of foreign currency for internal trade. We then study how changes in government policy regarding enforcement of currency laws affects the equilibrium value of both currencies, the exchange rate and goverment seigniorage revenues. In our one country, two currency model, we show that there are multiple monetary equilibria.
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- Chang, Roberto, 1989.
"Endogenous Currency Substitution, Inflationary Finance, And Welfare,"
89-12, C.V. Starr Center for Applied Economics, New York University.
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- Pinto, Brian, 1991. "Black markets for foreign exchange, real exchange rates and inflation," Journal of International Economics, Elsevier, vol. 30(1-2), pages 121-135, February.
- Camera, Gabriele, 2001. "Dirty money," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 377-415, April.
- Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 118-41, February.
- 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.
- Pitt, Mark M., 1984. "Smuggling and the black market for foreign exchange," Journal of International Economics, Elsevier, vol. 16(3-4), pages 243-257, May.
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