Currency Substitution under Transaction Costs

We consider a setting where agents can choose between two currencies to conduct their goods purchases. The usage of either currency comes with currency-specific transactions costs. For example, purchasing some goods with cryptocurrencies rather than dollars is easier and may avoid taxes. We explore...

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Bibliographic Details
Published in:AEA papers and proceedings 2019-05, Vol.109, p.83-87
Main Authors: Schilling, Linda M., Uhlig, Harald
Format: Article
Language:English
Subjects:
CRYPTOCURRENCY MARKETS
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Summary:We consider a setting where agents can choose between two currencies to conduct their goods purchases. The usage of either currency comes with currency-specific transactions costs. For example, purchasing some goods with cryptocurrencies rather than dollars is easier and may avoid taxes. We explore an extension of Schilling-Uhlig (2019), allowing for asymmetry in transaction costs as well as dollar-bitcoin exchange fees. Agents alternate in their role as buyers and sellers, necessitating currency. A central bank steers the dollar inflation path, while bitcoins are in fixed supply. We characterize the nonstochastic equilibrium and the resulting exchange rate dynamics.
ISSN:2574-0768
2574-0776
DOI:10.1257/pandp.20191017