Government Finance in a Model of Currency Substitution
Summary:
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.
Series:
Working Paper No. 1993/080
Subject:
Consumption Currencies Demand for money Dollarization Income tax systems
English
Publication Date:
October 1, 1993
ISBN/ISSN:
9781451955477/1018-5941
Stock No:
WPIEA0801993
Pages:
36
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