On the launching of a new currency

Sébastien Lotz*, Guillaume Rocheteau

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    23 Citations (Scopus)

    Abstract

    This paper studies the appropriate way of launching a new fiat currency within a dual currency search-theoretic framework. We demonstrate that legal tender laws may not be sufficient to guarantee the acceptability of the new currency, and that the old currency may continue to circulate if the enforcement power of legal tender laws is weak, and the fraction of individuals endowed with the new currency is too low. The possibility of converting the old currency into the new one can ease the transition to the new currency only if it is combined with strict legal tender laws. Finally, a network externality may generate inefficiencies in the decision to switch to the new currency.

    Original languageEnglish
    Pages (from-to)563-588
    Number of pages26
    JournalJournal of Money, Credit and Banking
    Volume34
    Issue number3 I
    DOIs
    Publication statusPublished - Aug 2002

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