publication . Other literature type . 1999

Stores, Prices, and Currency Substitution

Gabriele, Camera; Winkler, Johannes;
Open Access
  • Published: 01 Jan 1999
  • Publisher: Purdue University
  • Country: United States
We study endogenous currency substitution in a decentralized trade environment. Sellers maximize profits from sales of imperfectly substitutable goods by posting prices in either one of two currencies. A unique symmetric equilibrium exists where goods are priced only in the local currency. This occurs if foreign trade is sporadic, there is sufficient but not excessive liquidity, and discounting is low. Excess or scarcity of liquidity, however, induces sellers to extract all surplus from buyers. This destroys the monetary equilibrium and shuts down trade. Equilibria with and without currency substitution coexist on some redion of the parameter space, and may be m...
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Other literature type . 1999
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