Currency Substitution under Transaction Costs
AEA Papers and Proceedings
vol. 109,
May 2019
(pp. 83-87)
Abstract
We consider a setting where agents can choose between two currencies to conduct their goods purchases. The usage of either currency comes with currency-specific transactions costs. For example, purchasing some goods with cryptocurrencies rather than dollars is easier and may avoid taxes. We explore an extension of Schilling-Uhlig (2019), allowing for asymmetry in transaction costs as well as dollar-bitcoin exchange fees. Agents alternate in their role as buyers and sellers, necessitating currency. A central bank steers the dollar inflation path, while bitcoins are in fixed supply. We characterize the nonstochastic equilibrium and the resulting exchange rate dynamics.Citation
Schilling, Linda M., and Harald Uhlig. 2019. "Currency Substitution under Transaction Costs." AEA Papers and Proceedings, 109: 83-87. DOI: 10.1257/pandp.20191017Additional Materials
JEL Classification
- D23 Organizational Behavior; Transaction Costs; Property Rights
- E31 Price Level; Inflation; Deflation
- E42 Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
- E51 Money Supply; Credit; Money Multipliers
- E52 Monetary Policy
- E58 Central Banks and Their Policies