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Seminar : “Currency Competition in a New Monetarist Model” By Dr Parag Waknis (University of Massachusetts Dartmouth)
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Date: 9th August 2017 (Wednesday)
Time: 4:00 pm
Venue: Seminar Hall 1
Whether currency can be efficiently provided by competitive money suppliers is arguably one of the fundamental questions in monetary theory. It is also one with practical relevance because of the emergence of multiple competing financial assets as well as competing cryptocurrencies as means of payments in certain class of transactions. In this paper, a dual currency version of Lagos and Wright (2005) money search model is used to explore the answer to this question. The environment is characterized by no commitment and the two money suppliers are incorporated as utility-maximizing players in the centralized market sub-period. This makes this sub-period an infinitely repeated game between two large players (money suppliers) and a small player (a continuum of agents), where size of the players refers to the ability to influence aggregate outcomes. The large-small player dynamics pins down the equilibrium set of payoffs. There are multiple equilibria but competition between the money suppliers allows the use of renegotiation proof-ness as an equilibrium selection mechanism. Accordingly, equilibrium featuring lowest inflation tax is weakly renegotiation proof, suggesting that better inflation outcome is possible in an environment with currency competition.