Government Finance in a Model of Currency Substitution
36 Pages Posted: 15 Feb 2006
Date Written: October 1993
Abstract
Our model is a variant of the cash-in-advance model. Goods must be purchased in the seller`s currency, but currency may be traded before shopping at a cost. This cost is a measure of substitutability. The model is applied to seignorage taxation. We show that optimal money growth is positive and increasing in substitutability if and only if first- and second-period consumption are gross substitutes. If governments act independently, money growth is suboptimally low if currencies are sufficiently substitutable and too high otherwise.
JEL Classification: F36
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Carmen Reinhart, Kenneth Rogoff, ...
-
Dollarization in Latin America: Recent Evidence and Some Policy Issues
-
Dollarization in Transition Economies: Evidence and Policy Implications
By Ratna Sahay and Carlos Végh
-
Dollarization of Financial Intermediation: Causes and Policy Implications
-
The Choice of Exchange Rate Regime and Monetary Target in Highly Dollarized Economies
By Andrew Berg and Eduardo Borensztein
-
Network Externalities and Dollarization Hysteresis: The Case of Russia
By Nienke Oomes