Government Finance in a Model of Currency Substitution
October 1, 1993
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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
Pages:
36
Volume:
1993
DOI:
Issue:
080
Series:
Working Paper No. 1993/080
Stock No:
WPIEA0801993
ISBN:
9781451955477
ISSN:
1018-5941
