Government finance with currency substitution

Sibert, Anne and Liu, L. (1998) Government finance with currency substitution. Journal of International Economics 44 (1), pp. 155-172. ISSN 0022-1996.

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Official URL: https://doi.org/10.1016/S0022-1996(97)00023-8

Abstract

We analyze seigniorage in an overlapping-generations model where a friction induces a precautionary demand for a weaker currency. The friction, which is modeled as a transactions cost, is viewed as an inverse measure of currency substitutability. Governments finance spending with costly income taxation or seigniorage. We show that if governments act independently, money growth is suboptimally low if currencies are sufficiently substitutable and too high otherwise. If money growth is suboptimally low, increasing substitutability lowers it further. However, since greater substitutability is associated with smaller real costs of exchanging money, welfare need not fall.

Metadata

Item Type:	Article
School:	Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School
Depositing User:	Sarah Hall
Date Deposited:	28 Jul 2020 07:48
Last Modified:	02 Aug 2023 18:01
URI:	https://eprints.bbk.ac.uk/id/eprint/32710

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