DP4039 Inside-Outside Money Competition

Author(s): Ramon Marimon , Juan Pablo Nicolini , Pedro Teles

Publication Date: September 2003

Keyword(s): electronic money , inside money , currency competition , reputation , inflation

JEL(s): E40 , E50 , E58 , E60

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP4039.asp

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.