Currency restrictions, government transaction policies and currency exchange

Abstract

We study how currency restrictions and government transaction policies affect the values of fiat currencies in a two country, divisible good, search model. We show that these policies can generate equilibria where both currencies circulate as medium of exchange and where currency exchange occurs between citizens of different countries. Restrictions on the internal use of foreign currency can cause the domestic currency to be relatively more valuable to domestic agents while taxes on domestic currency create an incentive for home agents to hold foreign currency. We demonstrate that some policies increase prices and lower welfare while others do the reverse. Copyright Springer-Verlag Berlin Heidelberg 2003Keywords and Phrases: Search, Money, Currency exchange., JEL Classification Numbers: E4, E5, F3.,

The Political Economy of Bitcoin

“…They use a random matching model and only consider a transactions policy that compels agents to hold government‐issued money. Similarly, Waller and Curtis () consider the use of government transactions policy in the context of competing international currencies. They also limit considerations to the random matching model.…”

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“…Zhou (1997) introduces tastes shocks into the Matsuyama, Kiyotaki and Matsui model to generate currency exchange but, due to the one-unit inventory restrictions on money holdings, the nominal exchange rate is arbitrarily fixed at 1:1. Waller and Curtis (2001) extend Trejos and Wright (2000) to show how currency restrictions can generate currency exchange but again the nominal exchange rate is 1:1. Thus, the inventory constraint prevents us from studying equilibrium determination of nominal exchange rates at values other than 1:1.…”

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“…In the early search theoretic models of money, agents are able to choose which currencies to accept and use for payment. This literature shows that multiple currencies can circulate even if one is dominated in rate of return and the nominal exchange rate is determinate [see Matsuyama, Kiyotaki and Matsui (1993), Zhou (1997) and Waller and Curtis (2003), Craig and Waller (2004), Camera, Craig and Waller (2004)]. In these models, currency exchange can occur in bilateral matches if agents' portfolios are overly weighted towards one currency or the other.…”

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