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Currency competition in a fundamental model of money

Version 2 2024-06-13, 10:35
Version 1 2017-07-26, 12:35
journal contribution
posted on 2024-06-13, 10:35 authored by G Camera, B Craig, CJ Waller
We study how two fiat monies, one safe and one risky, compete in a decentralized trading environment. The currencies' equilibrium values, their transaction velocities and agents' spending patterns are endogenously determined. We derive conditions under which agents holding diversified currency portfolios spend the safe currency first and hold the risky one for later purchases. We also examine when the reverse spending pattern is optimal. Traders generally favor dealing in the safe currency, unless trade frictions and the currency risk is low. As risk increases or trading becomes more difficult, the transaction velocity and value of the safe money increases.

History

Journal

Journal of international economics

Volume

64

Pagination

521-544

Location

Amsterdam, The Netherlands

ISSN

0022-1996

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal

Copyright notice

2003, Elsevier B.V.

Issue

2

Publisher

Elsevier BV

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