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Is a Secondary Currency Essential? – On the Welfare Effects of a New Currency

Author

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  • Fuchs Max

    (Research assistant, Department of Economics, University of Kassel, Nora-Platiel-Straße 4, 34127, Kassel, Germany)

  • Michaelis Jochen

    (Professor, Department of Economics, University of Kassel, Nora-Platiel-Straße 4, 34127, Kassel, Germany)

Abstract

The coexistence of fiat money (cash) and digital monies constitutes a system of parallel currencies as media of exchange. This paper asks whether a new (digital) currency is essential: Does a new currency allow for a better resource allocation even if a fully accepted currency is in circulation and remains in circulation? Using the dual currency search model of Kiyotaki and Wright (1993. A search-theoretic approach to monetary economics. Am. Econ. Rev. 83: 63–77), we show how the introduction of a secondary currency affects average utility. There is some scope for a welfare improvement as the welfare effect depends on differences in returns and costs, and, in particular, on the proportion of cash traders who will be replaced by digital money traders.

Suggested Citation

  • Fuchs Max & Michaelis Jochen, 2023. "Is a Secondary Currency Essential? – On the Welfare Effects of a New Currency," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 243(2), pages 153-167, April.
    • Handle: RePEc:jns:jbstat:v:243:y:2023:i:2:p:153-167:n:6
    DOI: 10.1515/jbnst-2022-0054
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    References listed on IDEAS

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    More about this item

    Keywords

    digital money; dual currency regime; welfare comparison;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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