Is a Secondary Currency Essential? – On the Welfare Effects of a New Currency

Max Fuchs () and Jochen Michaelis ()
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Max Fuchs: University of Kassel

MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: The coexistence of cash and digital currencies constitutes a system of parallel currencies. This paper tackles the question whether a new (digital) currency is essential: Does a new currency allow for a better resource allocation even if a fully accepted currency is in circulation and still remains in circulation? Using the dual currency search model of Kiyotaki and Wright (1993), we show how the introduction of a secondary currency affects average utility. There is some scope for a welfare improvement, the welfare effect depends on differences in returns and costs, and, in particular, the fraction of cash traders who will be replaced by digital money traders.

Keywords: digital money; dual currency regime; welfare comparison (search for similar items in EconPapers)
JEL-codes: E41 E42 E51 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2022
New Economics Papers: this item is included in nep-mac, nep-mon, nep-ore and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:mar:magkse:202205

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