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INTERNATIONAL CURRENCY SUBSTITUTION AND SEIGNIORAGE IN A SIMPLE MODEL OF MONEY
Author(s) -
Imrohoroglu Selahattin
Publication year - 1996
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1996.tb01397.x
Subject(s) - seigniorage , currency substitution , economics , elasticity of substitution , monetary economics , inflation (cosmology) , currency , market liquidity , small open economy , monetary policy , substitution (logic) , order (exchange) , broad money , devaluation , macroeconomics , finance , production (economics) , physics , theoretical physics , computer science , programming language
This paper investigates the economic signcance of currency substitution using a small, open economy model of money. The main result is that in a low‐inflation economy the seigniorage‐maximizing inflation rate can be quite large despite a very high elasticity of currency substitution when the share of foreign real balances in producing domestic liquidity services is small (as some recent econometric estimates indicate in the case of Canada). This suggests that currency substitution is likely to be of second‐order importance to policymakers in a low‐inflation economy where foreign real balances provide economically small domestic liquidity services.