understanding the welfare implications of currency substitution abstract this paper develops a model of endogenous currency substitution where agents decide which purchases will be made with domestic and which with foreign currency in a representative agent economy allowing for this use of alternative means of payments is welfare enhancing the result is an application of ramsey taxation rules by which currency substitution shifts the burden of the inflation tax towards relatively demand inelastic commodities when extending the model to the case in which agents have different productivities we show that inflation has strong income distribution effects with high low income agents benefitting losing when currency substitution is introduced

a search theoretic model of legal and illegal currency abstract using a search theoretic model of money we explore the conditions under which two currencies domestic and foreign will co exist despite legal restrictions on the use of foreign currency for internal trade we study how changes in government policy i e its enforcement of currency laws through fines or the rate of enforcement affects the acceptability of illegal currency the equilibrium value of both currencies and the implicit exchange rate first we construct a model with indivisible goods to show conditions under which legal currency is fully acceptable but illegal currency circulates with varying acceptability we then introduce bargaining to determine prices in legal and illegal currency we show that some enforcement polices can create multiple equilibria while others will not also some methods of enforcement are capable of driving the illegal currency out of circulation while others are not

wage rigidity in canadian collective bargaining agreements the authors search information on the provisions of 10 947 wage contracts signed in the canadian unionized sector between 1976 and 1999 for evidence of downward nominal wage rigidity the disinclination of wages to fall in nominal dollars below their established level over the sample period real wage reductions were common but nominal wage reductions were rare the probability of downward nominal wage rigidity increased substantially during low inflation periods during such periods apparently there was no reduction in the incidence of real wage cuts but the magnitude of those cuts was modest suggesting a lesser ability of wages to adjust to labor market conditions than at other times

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

monetary aggregates and output series title working paper frb title monetary aggregates and output date publication federal reserve bank of cleveland working paper no 9813 author s scott freeman finn kydland type working paper frb topics s us economy

hysteresis in a simple model of currency substitution abstract a cash in advance model in which the cost of buying goods with a foreign currency is decreasing in the economy s accumulated experience in transacting in the foreign currency is shown to display hysteresis in money velocity that is a temporary increase in expected inflation can cause a permanent increase in velocity in addition the model implies that the domestic currency does not have to dominate the foreign currency in rate of return to induce agents to stop using the foreign currency finally inflation rates that trigger currency substitution need not be associated with steady states in which the domestic currency disappears from circulation

money and growth an alternative approach this paper takes an alternative approach to the topic of money and growth by developing a model in which the effects of sustained capital accumulation on an evolving system of payments in addition to the conventional effects of sustained inflation on growth are examined while the effects of inflation on growth are small the effects of growth on the monetary system are substantial the results are consistent with ideas about money and growth contained in work that predates that of james tobin and miguel sidrauski as well as with evidence that money and asset demands vary systematically within economies as they develop copyright 1994 by american economic association

endogenous currency substitution inflationary finance and welfare in some countries a foreign currency has replaced the domestic one to perform the functions of money this phenomenon is known as currency substitution this paper explores the relationship between currency substitution and inflationary finance in an overlapping generations model in which currency substitution is an endogenous equilibrium outcome the author describes when currency substitution may emerge and shows that it may be a purely expectational phenomenon he uses the model to discuss the welfare effects of inflation and the effects of policies that deal directly with currency substitution cs copyright 1994 by ohio state university press

endogenous multiple currencies in this paper i study a model in which households can decide which currency or currencies they will accept i provide a simple set of assumptions that are sufficient to prevent the indeterminacy of the exchange rate in the sense of kareken and wallace 1981 in a two country model stable equilibria have either a single currency or national currencies i also show currency substitution occurs as an endogenous response to high growth in the stock of a currency

currency exchange in a random search model this paper investigates foreign exchange trading a phenomenon that typically accompanies international trade a search theoretic general equilibrium approach is adopted to study a two country two currency model for some parameter values of the model there exist some pure strategy equilibria in which commodity currency trade is conducted primarily through local currency and in which there is active currency currency exchange the coexistence of valued foreign currency and its local non acceptability conforms largely with the country specific cash in advance constraint that is often assumed exogenously in international finance literature

toward a theory of international currency we use the framework of random matching games and develop a two country model of the world economy in which two national currencies compete and may be circulated as media of exchange there are multiple equilibria which differ in the areas of circulation of the two currencies in one equilibrium the two national currencies are circulated only locally in another one currency is circulated as an international currency there is also an equilibrium in which both currencies are accepted internationally we also find an equilibrium in which the two currencies are directly exchanged we first characterize the existence conditions of these equilibria in terms of the relative country size and the degree of economic integration and then use an evolutionary approach to equilibrium selection to explain the evolution of the international currency as the two economies become more integrated some welfare implications are also discussed for example a country can improve its national welfare by letting its own currency circulate internationally provided the domestic circulation is controlled for when the total supply is fixed however a resulting currency shortage may reduce the national welfare

government finance with currency substitution abstract we analyze seigniorage in an overlapping generations model where a friction induces a precautionary demand for a weaker currency the friction which is modeled as a transactions cost is viewed as an inverse measure of currency substitutability governments finance spending with costly income taxation or seigniorage we show that if governments act independently money growth is suboptimally low if currencies are sufficiently substitutable and too high otherwise if money growth is suboptimally low increasing substitutability lowers it further however since greater substitutability is associated with smaller real costs of exchanging money welfare need not fall

a fundamental theory of exchange rates and direct currency trades in this paper we construct a two country search model to determine the nominal exchange rate between two fiat monies our model allows agents to use any currency to trade for goods in all countries however search frictions restrict agents opportunities for instantaneous arbitrage and hence make the nominal exchange rate determinate the nominal exchange rate depends on the two countries economic fundamentals including the stocks and growth rates of the two monies direct exchanges between currencies are essential and they imply a nominal exchange rate that is different from the relative price between the two currencies in the goods markets there are persistent violations of the law of one price and purchasing power parity in equilibrium despite the fact that prices are perfectly flexible and all goods are tradeable between countries nominal and real exchange rates can move together in the steady state in response to money growth shocks

on the indeterminacy of equilibrium exchange rates in this paper we consider a particular international economic policy regime the laissez faire regime the distinguishing features of which are unrestricted portfolio choice and floating exchange rates and as we show this regime although favored by many economists is not economically feasible it does not have a determinate equilibrium that is an implication of an overlapping generations model more basically it is an implication of the notion that money is wanted only in order to accomplish trades

other people s money cash in advance microfoundations for optimal currency areas abstract in the traditional theory of optimal currency areas there are potential gains for stabilization policy with an independent exchange rate and money because rigidity of prices causes an inadequate response of relative prices to shocks recent empirical work using modern extensions of the mundell fleming model based on nominal contracts has supported this view this paper examines whether there is support for it in a classical representative agent model of linked open economies and finds that there is the result comes from the cash in advance constraint under which the household faces an inevitable delay between working receiving cash and being able to spend the proceeds this delay is the cash in advance analogue of the nominal price rigidity in the optimal currency area models

nonfundamental uncertainty and exchange rates this paper shows that there can be equilibria in which exchange rates display randomness unrelated to fundamentals this is demonstrated in the context of a two currency one good model with three agent types and cash in advance constraints a crucial feature is that the type i agents for i 1 2 must satisfy a cash in advance constraint by holding currency i while type 3 agents can satisfy it by holding either currency it is shown that real allocations vary across the multiple equilibria if markets for hedging exchange risk do not exist and that the randomness is innocuous if complete markets exist

economic growth financial evolution and the long run behavior of velocity a general equilibrium model is presented in which buyers and sellers find it increasingly difficult to make private credit arrangements as economic activity spreads into new markets hence the demand for money increases as the structure of production and trade becomes more complex at the same time however financial innovations allow agents to economize on their cash balances together these effects of technological progress account for two empirical regularities the u shaped pattern in velocity and the ever increasing share of productive resources devoted to the private financial sector that are associated with the process of real economic growth

currency substitution under finance constraints the perfect foresight continuous time couterpart of lucas and stokey s cash in advance model is generalized to the case of two currencies the money demand function for eac currency has as arguments the endowments of goods associated with each denomination various monetary shocks are investigated including permanent and temporary changes in levels and growth rates it is shown that substitution can be an important factor in explaining the possible negative transmission of inflation the amount of volatility of exchange rates and the degree tp which exchange rate movements approximate a random walk

future oil supply the changing stance of the international energy agency the iea was established in 1974 with a mandate to promote energy security amongst its members namely the states of the oecd and to advise those members on sound energy policy its recent forecasts of the medium and long term prospects for oil supply however have wavered alternating from optimistic to pessimistic and back again for policy makers such inconsistency is difficult to deal with firstly we examine whether the changing outlooks seen in iea forecasts made between 2007 and 2010 truly reflect a demonstrable underlying change in the known facts and we can find no such factual changes reported by the iea secondly we examine whether the serious criticisms of the iea s 2008 forecast made by other analysts have yet been addressed and we conclude that they have not thirdly we consider the possible effects of the current economic downturn upon the iea s assumptions and upon future oil supply we conclude that all the forecasts made by the iea appear to be too optimistic throughout this period

money and prices a model of search and bargaining abstract this paper makes commodities divisible and incorporates bargaining into the search theoretic model of money to determine the purchasing power of money or price it is shown that two monetary equilibria always coexist where fiat money is universally accepted the two equilibria differ in price output welfare and the velocity of money sunspot monetary equilibria exist in which money is universally accepted in all states of the economy multiplicity has novel implications on the effectiveness of currency substitution and exchange market intervention journal of economic literature classification numbers c78 e40

on exchange rates and economic growth abstract extending ireland s 1994 model this paper analyzes an international economy where cash or credit can be used for payment foreign trade credit is more costly than its domestic analog a depreciation of the real exchange rate is associated with an external surplus and a reduced share of imports purchased with credit economic growth slows when foreign trade credit becomes the predominant means of payment for international transactions a country with high inflation exports its tobin effect and thus temporarily increases world growth