The Transactions Demand for Paper and Digital Currencies

No 17-E-06, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: This paper investigates optimal currency choice, particularly the choice between paper and digital currencies, when currency is utilized solely as a medium of exchange. The Baumol-Tobin model of transactions demand for money is extended to derive conditions under which digital currency is preferred to paper currency, taking into consideration the network externality in the choice of currencies. The model is applied to explain potential variations in currency preferences across countries, especially between advanced and developing economies. Also discussed is how the introduction of negative interest rates, currency taxes, and central bank digital currency affect optimal currency choice.

Keywords: Digital currency; Money demand; Network externality; Negative interest rate; Currency tax (search for similar items in EconPapers)
JEL-codes: E20 E41 E58 P44 (search for similar items in EconPapers)
Date: 2017-07
New Economics Papers: this item is included in nep-ban, nep-ict, nep-mac, nep-mon and nep-pay
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Persistent link: https://EconPapers.repec.org/RePEc:ime:imedps:17-e-06

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