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Launching of a New Currency in a Simple Random Matching Model

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  • Sébastien LOTZ
  • Guillaume ROCHETEAU

Abstract

This paper studies the launching of a new fiat currency within a search-theoretic framework. We show that legal tender laws may not be sufficient to guarantee the acceptability of the new currency, and that the withdrawal of a large fraction of the competing currency is essential to avoid the failure of such a launching. The possibility of converting the old currency into the new one can ease the transition to the new currency only if it is combined with strict legal tender laws. Finally, a network externality is identified that may generate inefficiencies in the conversion decision.

Suggested Citation

  • Sébastien LOTZ & Guillaume ROCHETEAU, 2000. "Launching of a New Currency in a Simple Random Matching Model," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 00.10, Université de Lausanne, Faculté des HEC, DEEP.
  • Handle: RePEc:lau:crdeep:00.10
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    References listed on IDEAS

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    1. Edward J. Green & Warren E. Weber, 1996. "Will the new $100 bill decrease counterfeiting?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-10.
    2. Aiyagari, S. Rao & Wallace, Neil, 1997. "Government Transaction Policy, the Medium of Exchange, and Welfare," Journal of Economic Theory, Elsevier, vol. 74(1), pages 1-18, May.
    3. Ben R. Craig & Christopher J. Waller, 1999. "Currency portfolios and nominal exchange rates in a dual currency search economy," Working Paper 9916, Federal Reserve Bank of Cleveland.
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    7. Selgin, George A, 1994. "On Ensuring the Acceptability of a New Fiat Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 808-826, November.
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    Cited by:

    1. Ben Fung & Hanna Halaburda, 2016. "Central Bank Digital Currencies: A Framework for Assessing Why and How," Discussion Papers 16-22, Bank of Canada.

    More about this item

    Keywords

    money; search; currency reform; legal tender laws;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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