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Legal restrictions and international currencies: An experimental approach

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  • Ding, Shuze
  • Puzzello, Daniela

Abstract

This paper integrates theory and experiments to explore how policy rules related to government interventions can affect economic allocations and the international status of a currency. Using a two-country, two-currency search model, we study two types of government interventions: (1) legal restrictions impacting a seller's ability to accept a foreign currency, and (2) reductions to the cost a seller must pay to accept a foreign currency. The first intervention can be viewed as a way to capture a decrease in capital controls, while the second can be viewed as a way to explore the impact of reducing information costs associated with using a foreign currency. Our results indicate that abolishing legal restrictions that impact a seller's ability to accept a foreign currency can increase both quantities traded and the number of trades involving two types of currencies. Additionally, the international status of currencies is significantly enhanced when sellers face very low foreign currency acceptance costs.

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  • Ding, Shuze & Puzzello, Daniela, 2020. "Legal restrictions and international currencies: An experimental approach," Journal of International Economics, Elsevier, vol. 126(C).
    • Handle: RePEc:eee:inecon:v:126:y:2020:i:c:s0022199620300581
    DOI: 10.1016/j.jinteco.2020.103342
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    Cited by:

    1. Davis, Douglas & Korenok, Oleg & Norman, Peter & Sultanum, Bruno & Wright, Randall, 2022. "Playing with money," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1221-1239.
    2. Jiang, Janet Hua & Puzzello, Daniela & Zhang, Cathy, 2023. "Inflation, Output, and Welfare in the Laboratory," European Economic Review, Elsevier, vol. 152(C).
    3. Janet Hua Jiang & Peter Norman & Daniela Puzzello & Bruno Sultanum & Randall Wright, 2024. "Is Money Essential? An Experimental Approach," Journal of Political Economy, University of Chicago Press, vol. 132(9), pages 2972-2998.
    4. Toraubally, Waseem A., 2022. "Strategic trading and Ricardian comparative advantage," Journal of Economic Behavior & Organization, Elsevier, vol. 195(C), pages 428-447.
    5. Tao Liu & Dong Lu & Liang Wang, 2023. "Hegemony or Harmony? A Unified Framework for the International Monetary System," Working Papers 202305, University of Hawaii at Manoa, Department of Economics.
    6. Arrieta Vidal, Johar & Florián Hoyle, David & López Vargas, Kristian & Morales Vásquez, Valeria, 2022. "Policies for transactional de-dollarization: A laboratory study," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 31-54.
    7. Fuchs Max & Michaelis Jochen, 2023. "Is a Secondary Currency Essential? – On the Welfare Effects of a New Currency," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 243(2), pages 153-167, April.
    8. John Duffy & Daniela Puzzello, 2022. "The Friedman Rule: Experimental Evidence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(2), pages 671-698, May.
    9. Marcos Cardozo & Yaroslav Rosokha & Cathy Zhang, 2024. "On the Emergence of International Currencies: An Experimental Approach," Purdue University Economics Working Papers 1351, Purdue University, Department of Economics.

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    More about this item

    Keywords

    Search models of money; International economics; Monetary experiment;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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