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

Author

Listed:
  • Max Fuchs

    (University of Kassel)

  • Jochen Michaelis

    (University of Kassel)

Abstract

The coexistence of cash and digital currencies constitutes a system of parallel currencies. This paper tackles the question 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 still remains in circulation? Using the dual currency search model of Kiyotaki and Wright (1993), we show how the introduction of a secondary currency affects average utility. There is some scope for a welfare improvement, the welfare effect depends on differences in returns and costs, and, in particular, the fraction of cash traders who will be replaced by digital money traders.

Suggested Citation

  • Max Fuchs & Jochen Michaelis, 2022. "Is a Secondary Currency Essential? – On the Welfare Effects of a New Currency," MAGKS Papers on Economics 202205, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    • Handle: RePEc:mar:magkse:202205
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    References listed on IDEAS

    as
    1. Harald Uhlig & Taojun Xie, 2020. "Parallel Digital Currencies and Sticky Prices," Working Papers 2020-188, Becker Friedman Institute for Research In Economics.
    2. Thakor, Anjan, 2020. "Corrigendum to: Fintech and Banking: What Do We Know?," Journal of Financial Intermediation, Elsevier, vol. 43(C).
    3. Fegatelli, Paolo, 2022. "A central bank digital currency in a heterogeneous monetary union: Managing the effects on the bank lending channel," Journal of Macroeconomics, Elsevier, vol. 71(C).
    4. Airaudo, Marco, 2014. "Currency substitution, risk premia and the Taylor principle," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 202-217.
    5. Selcuk, Faruk, 2003. "Currency substitution: new evidence from emerging economies," Economics Letters, Elsevier, vol. 78(2), pages 219-224, February.
    Full references (including those not matched with items on IDEAS)

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    Keywords

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    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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