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The Transactions Demand for Paper and Digital Currencies

Author

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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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    File URL: http://www.imes.boj.or.jp/research/papers/english/17-E-06.pdf
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    References listed on IDEAS

    as
    1. William J. Baumol, 1952. "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 66(4), pages 545-556.
    2. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
    3. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 1007-1057.
    4. Kenneth S. Rogoff, 2016. "The Curse of Cash," Economics Books, Princeton University Press, edition 1, number 10798.
    5. Jovanovic, Boyan, 1982. "Inflation and Welfare in the Steady State," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 561-577, June.
    6. Barrdear, John & Kumhof, Michael, 2016. "The macroeconomics of central bank issued digital currencies," Bank of England working papers 605, Bank of England.
    7. Iwamura, Mitsuru & Kitamura, Yukinobu & Matsumoto, Tsutomu & Saito, Kenji, 2014. "Can We Stabilize the Price of a Cryptocurrency?: Understanding the Design of Bitcoin and Its Potential to Compete with Central Bank Money," Discussion Paper Series 617, Institute of Economic Research, Hitotsubashi University.
    8. Ruchir Agarwal & Miles Kimball, 2015. "Breaking Through the Zero Lower Bound," IMF Working Papers 15/224, International Monetary Fund.
    9. Ali, Robleh & Barrdear, John & Clews, Roger & Southgate, James, 2014. "Innovations in payment technologies and the emergence of digital currencies," Bank of England Quarterly Bulletin, Bank of England, vol. 54(3), pages 262-275.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Digital currency; Money demand; Network externality; Negative interest rate; Currency tax;

    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 - Economic Systems - - Other Economic Systems - - - National Income, Product, and Expenditure; Money; Inflation

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