We study how two fiat monies, one safe and one risky, compete in a decentralized trading environment. The currencies' equilibrium values, their transaction velocities and agents' spending patterns are endogenously determined. We derive conditions under which agents holding diversified currency portfolios spend the safe currency first and hold the risky one for later purchases. We also examine when the reverse spending pattern is optimal. Traders generally favor dealing in the safe currency, unless trade frictions and the currency risk is low. As risk increases or trading becomes more difficult, the transaction velocity and value of the safe money increases.
Camera, G., B. Craig and C. Waller (2004). Currency competition in a fundamental model of money. Journal of International Economics 64(2), 521-544. doi: 10.1016/j.jinteco.2003.09.002
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NOTICE: this is the author’s version of a work that was accepted for publication in Journal of International Economics. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of International Economics, volume 64, issue 2 (2004). DOI: 10.1016/j.jinteco.2003.09.002
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