Government Finance in a Model of Currency Substitution

October 1, 1993

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Format: Chicago

Lihong Liu, and Anne C. Sibert Government Finance in a Model of Currency Substitution, (USA: International Monetary Fund, 1993) accessed September 20, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Subject: Consumption, Currencies, Demand for money, Dollarization, Income tax systems

Keywords: Foreign currency, Money demand, Public finance, Spot market, WP

Publication Details

Pages:

36
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1993/080
Stock No:

WPIEA0801993
ISBN:

9781451955477
ISSN:

1018-5941

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