Events

Authors:

• Yiting LI
  National Taiwan University

• Akihiko MATSUI
  University of Tokyo

This paper studies how inflation affects the circulation of currencies and welfare in a two-country, two-currency search-theoretic model. An agent obtains utility from private good and the public good of his own country. Each government prints fiat money, taxes on money holdings, and use the seigniorage revenue to provide public goods. We find that, a higher tax on a currency reduces its likelihood to circulate domestically and abroad. The issuing country of international currency chooses a lower inflation tax rate than otherwise because the tax base is enlarged. The worldwide circulation of a currency yields higher welfare since the amount of public good provided is larger. We also show that a big country, by adopting a low inflation tax, may insure the existence of equilibrium that its currency circulates abroad. The negative impact of a country’s inflationary policy on the realms of circulation of its currency provides an inflation discipline.