22 Pages
English
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Strong and Weak Currencies in a Search Theoretic Model of Money

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22 Pages
English

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Strong and Weak Currencies in a Search-Theoretic Model of Money Richard Dutu? December 2001 Research Paper Abstract We construct a one-country search theoretic model of currency competition to study under which conditions a foreign strong currency can circulate alongside a domestic currency. Each competing money is de…ned by a couple (°i ; µi) where °i and µi, respectively, account for the rate of return and the bargaining power of money i: We discuss in this framework what strong and weak currencies may be. We show that the weakening of the domestic currency's bargaining power can favour the circulation of a strong currency by increasing the transactional utility of this foreign money - bad money attracts good money. It is then more pro…table to use the strong currency in exchange rather than to use it as a store of value. Conversely we show that the weakening of the domestic money's rate of return can prevent the circulation of the foreign money by reinforcing its store of value's role- bad money drives out good money. Finally we express the general relationship between the value of money 2 and the value of money 1. JEL Classi…cation: E31 E42 F33 1. Introduction The goal of this paper is to go further in the understanding of currency competition and currency substitution. Most related articles refer to the portfolio theory and set the problem in terms of the real rate of return on money.

  • monies

  • strong currency

  • money

  • meeting between

  • bargaining power

  • trade

  • °1 then

  • between accepting

  • money can

  • agent must


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