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Inflation, debt enforcement and currency competition

Rojas Breu, Mariana (2010-09), Inflation, debt enforcement and currency competition. https://basepub.dauphine.fr/handle/123456789/7352

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RojasBreu-2010.pdf (210.3Kb)
Type
Document de travail / Working paper
Date
2010-09
Publisher
Université Paris-Dauphine
Published in
Paris
Pages
30
Metadata
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Author(s)
Rojas Breu, Mariana
Abstract (EN)
International, low-inflation, currencies are increasingly available everywhere. However, domestic currencies remain the means of payment mostly used in the vast majority of countries. This observation conáicts with the literature on currency competition which predicts that, in absence of transaction costs, agents will prefer to use the less ináationary currency. In this paper, I provide a framework in which ináationary currencies are used, despite the availability of a less ináationary currency. I suggest that the use of domestic currencies is associated with the legal environment that determines the degree of debt enforcement. My key assumption is that full enforcement is not feasible. This entails that the rate of return on currencies is in part determined by incentives eliciting voluntary debt repayment. I show that, under certain conditions, the inflation rate of a currency in which debts are denominated may function as a commitment device. As a result, the more ináationary currency is preferred in equilibrium, despite the absence of costs in using the less ináationary currency.
Subjects / Keywords
Money; Currency Competition; Debt Enforcement; Banking
JEL
E41 - Demand for Money
E50 - General
E51 - Money Supply; Credit; Money Multipliers

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