Inside-Outside Money Competition
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.
