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Launching of a New Currency in a Simple Random Matching Model

  • Sébastien LOTZ
  • Guillaume ROCHETEAU

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.

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Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 00.10.

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Length: 46 pages
Date of creation: May 2000
Date of revision:
Publication status: Published in Journal of Money Credit and Banking, vol.34 (3), part 1, 2002, pp. 563-588
Handle: RePEc:lau:crdeep:00.10
Contact details of provider: Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.20
Web page:

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  1. Francois R. Velde & Warren E. Weber & Randall Wright, 1997. "A model of commodity money, with applications to Gresham's law and the debasement puzzle," Staff Report 215, Federal Reserve Bank of Minneapolis.
  2. Wright, Randall, 1999. "Comment on Inside and Outside Money as Alternative Media of Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 461-68, August.
  3. Caskey, John P & St Laurent, Simon, 1994. "The Susan B. Anthony Dollar and the Theory of Coin/Note Substitutions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(3), pages 495-510, August.
  4. Edward J. Green & Warren Weber, 1996. "Will the New $100 Bill Decrease Counterfeiting?," Macroeconomics 9609003, EconWPA, revised 11 Sep 1996.
  5. Li, Yiting & Wright, Randall, 1998. "Government Transaction Policy, Media of Exchange, and Prices," Journal of Economic Theory, Elsevier, vol. 81(2), pages 290-313, August.
  6. S. Rao Aiyagari & Neil Wallace, 1995. "Government transaction policy, the medium of exchange, and welfare," Working Papers 516, Federal Reserve Bank of Minneapolis.
  7. 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.
  8. Selgin, G., 1993. "On Ensuring the Acceptability of a New Fiat Money," Papers 368, Georgia - College of Business Administration, Department of Economics.
  9. Jovanovic, Boyan & Rosenthal, Robert W., 1988. "Anonymous sequential games," Journal of Mathematical Economics, Elsevier, vol. 17(1), pages 77-87, February.
  10. Nobuhiro Kiyotaki & Randall Wright, 1989. "A contribution to the pure theory of money," Staff Report 123, Federal Reserve Bank of Minneapolis.
  11. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
  12. Joseph Farrell & Garth Saloner, 1986. "Installed Base and Compatibility, With Implications for Product Preannouncements," Working papers 411, Massachusetts Institute of Technology (MIT), Department of Economics.
  13. Berentsen, Aleksander, 1997. "Monetary policy implications of digital money," MPRA Paper 37392, University Library of Munich, Germany.
  14. Craig, Ben, 1999. "Comment on Inside and Outside Money as Alternative Media of Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 458-60, August.
  15. Joseph A. Ritter, 1994. "The transition from barter to fiat money," Working Papers 1994-004, Federal Reserve Bank of St. Louis.
  16. Soller Curtis, Elisabeth & Waller, Christopher J., 2000. "A search-theoretic model of legal and illegal currency," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 155-184, February.
  17. Hernán Cortés Douglas & Richard K. Abrams, 1993. "Introduction of a New National Currency: Policy, Institutional, and Technical Issues," IMF Working Papers 93/49, International Monetary Fund.
  18. 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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