DP4039 Inside-Outside Money Competition

Author(s): Ramon Marimon, Juan Pablo Nicolini, Pedro Teles
Publication Date: September 2003
Keyword(s): currency competition, electronic money, inflation, inside money, reputation
JEL(s): E40, E50, E58, E60
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4039

We study how competition from privately-supplied currency substitutes affects monetary equilibria. Whenever currency is inefficiently provided, inside money competition plays a disciplinary role by providing an upper bound on equilibrium inflation rates. Furthermore, if ?inside monies? can be produced at a sufficiently low cost, outside money is driven out of circulation. Whenever a ?benevolent? government can commit to its fiscal policy, sequential monetary policy is efficient and inside money competition plays no role.