Studies On Network Effects And Currency Substitution

In practical level, currency substitution involv es the security of nationaleconomic security; at the theoretical level, Currency substitution goes to thevery core of money and monetary theory. Therefore, studies on currencysubstitution have a special significance for China, who is on the road ofexchange rate system reforming and opening of her national account. Startingby the study of attributes of money, this theses analysis the value effects andnetwork effects in the process of currency substitution. Comparative analysis of10 Latin America countries, which had experienced currency substitution,provides evidence to support our model.Chapter 1 reviews literatures on the pure theory of money andcurrency substitution. First, we point out that money has three essential roles:medium of exchange, storage of value, and unit of account, emphasized on different roleswill lead to different models. Then we review two main camp of the theory ofmoney origin. Special attention is given to the Mengerian theory of money,which is the theory foundation of our model, and some inadequate of theprevious model based on Mengerian theory are pointed out. Chapter 1 formsthe theoretical foundation of Chapter 2 and 3. After reviewing the pure theoryof money, we know that money is a network good, which have network effects.in Chapter 1, we also review the literatures on currency substitution, and wepoint out some shortcomings in the previous models. Chapter 2 give out a simple search model of money and point out twocritical attributes of money: the cost attribute and network attribute. Both thetwo attribute are important in the process of money evolution, and is the keyfactor individual considered for their holding decision. The model in thischapter is a simplified search model of money, it combines the value effectsand network effects of money into a unified framework, and proves theconvergence of money holding, that is, there is only a single currencyeventually, because of the network effects. In principle, this chapter charactersthe agent behavior of exchange; this makes money evolution a morecomprehensive process. Analyses monetary issue from the perspective ofmicro-behavior is an advance of our model.Chapter 3 extents the model in Chapter2, that is, from commoditymoney system to the fiat money system. In this chapter, we study the currencysubstitution in a dual currency system, also with a comprehensive micro-foundation. By comparing the value function of different money holding, weget the condition of currency substitution. We also get a inaction area in thecomparing static analyses. Further more, we discuss the policy againstcurrency substitution in our model. Based on the Mengerian theory, andconsidering different attributes of money in a single model is the greatestdifference of our model from the previous.In Chapter 4, we take different econometric tools to find evidencesupporting our model, including the unit root test, Granger causality test andEngle-Granger co-integration test. Owning to the availability of data, we takesome empirical evidence and theoretic evidence provided by other researchersto support our conclusions.The main conclusions of this thesis are: there exist both the valueeffects and network effects in the process of currency substitution. Valueeffects plays a significant role in the beginning of currency substitution,hyperinflation is the induce factor of currency substitution. However, changesin the network, which is induced by the value factors, are the main factorcontributed to the currency crisis. We also point out the inaction area of currency substitution, and made the network effects a reasonable reason ofinaction area and ratchet effects. This paper also analyzes the effectiveness ofpolicies against currency substitution; we concluded that policies whichincrease the friction cost of both sides of currency exchange will inhibitcurrency substation. However, policies which tax t he single side, normally taxthe exchange for foreign currency will exacerbate currency substitution.Of course, owning to my ability, knowledge and talent indeed, thereshould be some mistakes and problems, and needs a lot of improvement. So donot hesitate to give me a hand to find them out.