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The Transactions Demand for Paper and Digital Currencies

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  • Koichiro Kamada

    (Deputy Director-General, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouichirou.kamada@boj.or.jp))

Abstract

This paper investigates optimal currency choice, particularly the choice between paper and digital currencies, when currency is utilized solely as a medium of exchange. The Baumol-Tobin model of transactions demand for money is extended to derive conditions under which digital currency is preferred to paper currency, taking into consideration the network externality in the choice of currencies. The model is applied to explain potential variations in currency preferences across countries, especially between advanced and developing economies. Also discussed is how the introduction of negative interest rates, currency taxes, and central bank digital currency affect optimal currency choice.

Suggested Citation

  • Koichiro Kamada, 2017. "The Transactions Demand for Paper and Digital Currencies," IMES Discussion Paper Series 17-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:17-e-06
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Digital currency; Money demand; Network externality; Negative interest rate; Currency tax;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • P44 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - National Income, Product, and Expenditure; Money; Inflation

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