International Currency Substitution and Seigniorage in a Simple Model of Money

Selahattin Imrohoroglu

Economic Inquiry, 1996, vol. 34, issue 3, 568-78

Abstract: This paper investigates the economic significance 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. Copyright 1996 by Oxford University Press.

Date: 1996
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