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A Search Theoretic Model of Legal and Illegal Currency

Author

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  • Soller, E.V.
  • Waller, C.

Abstract

Using a search theoretic model of money, we explore the conditions under which two currencies, domestic and foreign, will co-exist depsite legal restrictions on the use of foreign currency for internal trade. We then study how changes in government policy regarding enforcement of currency laws affects the equilibrium value of both currencies, the exchange rate and goverment seigniorage revenues. In our one country, two currency model, we show that there are multiple monetary equilibria.

Suggested Citation

  • Soller, E.V. & Waller, C., 1997. "A Search Theoretic Model of Legal and Illegal Currency," Papers 97-003, Indiana - Center for Econometric Model Research.
    • Handle: RePEc:fth:indian:97-003
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    References listed on IDEAS

    as
    1. Ben R. Craig & Christopher J. Waller, 2000. "Dual-currency economies as multiple-payment systems," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 2-13.
    2. Alberto Trejos & Randall Wright, 1996. "Search-theoretic models of international currency," Proceedings, Federal Reserve Bank of St. Louis, vol. 78(May), pages 117-132.
    3. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
    4. Chang, Roberto, 1994. "Endogenous Currency Substitution, Inflationary Finance, and Welfare," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 903-916, November.
    5. Pitt, Mark M., 1984. "Smuggling and the black market for foreign exchange," Journal of International Economics, Elsevier, vol. 16(3-4), pages 243-257, May.
    6. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 118-141, February.
    7. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
    8. Kimbrough, Kent P., 1991. "Optimal taxation and inflation in an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 15(1), pages 179-196.
    9. Camera, Gabriele, 2001. "Dirty money," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 377-415, April.
    10. Pinto, Brian, 1991. "Black markets for foreign exchange, real exchange rates and inflation," Journal of International Economics, Elsevier, vol. 30(1-2), pages 121-135, February.
    11. Li, Victor E, 1995. "The Optimal Taxation of Fiat Money in Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 927-942, November.
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    More about this item

    Keywords

    CURRENCIES ; EXCHANGE RATE ; MODELS;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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