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Liquidity Premium and International Seigniorage Payments

  • Benjamin Eden

    ()

    (Department of Economics, Vanderbilt University)

Why do people hold dollar denominated assets when higher rate of return alternatives are available? Can a country collect seigniorage payments from other countries in the long run? Does the supplier of the international currency benefit from doing so? I provide qualitative answers to these related questions in terms of a model with price dispersion, heterogeneous agents and two government-backed assets (interest-bearing monies). In the steady state one of the assets is used primarily in low price transactions and earns a relatively low (measured) real rate of return. The stable demand country that issues the relatively liquid asset gets seigniorage but its welfare may be less than under autarky because trade increases the uncertainty about demand in the relevant markets and uncertainty sometimes leads to ex-post pricing mistakes and waste.

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File URL: http://www.accessecon.com/pubs/VUECON/vu09-w01.pdf
File Function: First version, 2009
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Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0901.

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Date of creation: Jan 2009
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Handle: RePEc:van:wpaper:0901
Contact details of provider: Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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