We wish to thank the anonymous referee for valuable comments and suggestions that greatly improved the paper. We also thank the seminar participants at University of Hong Kong and the 76th Annual Conference of Western Economic Association International, San Francisco, 2001, for feedbacks and comments. We are, of course, responsible for any remaining errors.
Confidence in Domestic Money and Currency Substitution
Article first published online: 26 MAR 2007
Volume 41, Issue 3, pages 407–419, July 2003
How to Cite
Tandon, A. and Wang, Y. (2003), Confidence in Domestic Money and Currency Substitution. Economic Inquiry, 41: 407–419. doi: 10.1093/ei/cbg017
- Issue published online: 26 MAR 2007
- Article first published online: 26 MAR 2007
This article studies currency substitution in a model where domestic money suffers from lack of confidence. When agents' confidence is exogenous and constant, there is a unique but unstable dual-money steady state. However, when agents' confidence is updated endogenously, the dynamics of currency substitution are driven by agents' evolving beliefs, and the economy always converges to an equilibrium where both monies circulate. Therefore, the economy under endogenous beliefs exhibits both persistence in currency substitution and tenacity of domestic money. Furthermore, in general, there are multiple steady states, which can be Pareto ranked by the degree of currency substitution.