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.
Camera, G., Craig, B., Waller, C.J. (2004). Currency competition in a fundamental model of money. JOURNAL OF INTERNATIONAL ECONOMICS, 64(2), 521-544 [10.1016/j.jinteco.2003.09.002].
Currency competition in a fundamental model of money
Camera, Gabriele
;
2004
Abstract
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.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
