Endogenous
Multiple Currencies
By Antoine Martin
May 2002
RWP 02-03
Research Division
Federal Reserve Bank of Kansas City
Abstract
I study a model of multiple currencies in which sellers can choose the currency they will accept. I provide conditions that are necessary and sufficient to avoid indeterminacy of the exchange rate. Under these assumptions, all stable equilibria have the property that all sellers in the same country accept the same currency. Thus stable equilibria are either single currency or national currencies equilibria. I also show that currency substitution occurs as an endogenous response to high growth in the stock of a currency.
Keywords: Multiple Currencies, Currency Substitution
JEL Codes: F31, F41
Antoine Martin is an economist at the Federal Reserve Bank of Kansas City. He would like to thank V.V. Chari especially for his advice. He also thanks Craig Hakkio, Karsten Jeske, Sharon Kozicki, Stacey Schreft, Kei-Mu Yi, seminar participants at the 2002 Missouri Economic Conference, UQAM, and the University of Western Ontario for useful comments. The views expressed in this paper are solely those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System.
Martin e-mail: antoine.martin@kc.frb.org