Madison, F., "A Microfounded Approach to Currency Substitution and Government Policy"

Title: "A Microfounded Approach to Currency Substitution and Government Policy"

Speaker: Assistant Professor of Economics Florian Madison, Claremont McKenna College

Host: Assistant Professor Kospentaris Ioannis, Department of Economics, Athens University of Economics and Business

Venue: 2 Troias, Kimolou and Spetson Street, Room T101

Attachments:  PDF of Relevant Paper

Abstact: This paper develops a search-theoretic dynamic dual-currency model featuring endogenous currency substitution as a function of jointly-determined fiscal and monetary policy. Benevolent governments, unable to commit to future policies, weigh distortion-smoothing and time-consistency, where steady-state public expenditures, public debt, labor taxation, and inflation are determined using the notion of a Markov-perfect equilibrium. Currency substitution arises endogenously following cross-country differences in fundamentals, characterizing the relationship between payment patterns, fiscal, and monetary policy. An extension incorporating 'de jure' dollarization eliminates time-consistency concerns and reduces the objective of the government to distortion-smoothing exclusively.