Government Finance in a Model of Currency Substitution

36 Pages Posted: 15 Feb 2006

See all articles by Anne Sibert

Anne Sibert

Birkbeck, University of London; Centre for Economic Policy Research (CEPR)

Lihong Liu

affiliation not provided to SSRN

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

Sibert, Anne and Liu, Lihong, Government Finance in a Model of Currency Substitution (October 1993). IMF Working Paper No. 93/80, Available at SSRN: https://ssrn.com/abstract=883804

Anne Sibert (Contact Author)

Birkbeck, University of London ( email )

Malet Street
London, WC1E 7HX
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+44 20 7631 6416 (Fax)

HOME PAGE: http://www.ems.bbk.ac.uk/faculty/sibert/index_html

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Lihong Liu

affiliation not provided to SSRN

No Address Available

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