Inside-Outside Money Competition

Abstract

We study how competition from privately supplied currency substitutes affects monetary equilibria. Whenever currency is inefficiently provided, inside money competition plays a disciplinary role by providing an upper bound on equilibrium inflation rates. Furthermore, if "inside monies" can be produced at a sufficiently low cost, outside money is driven out of circulation. Whenever a "benevolent" government can commit to its fiscal policy, sequential monetary policy is efficient and inside money competition plays no role.

JEL Classification: E40, E50, E58, E60