Is a Secondary Currency Essential? – On the Welfare Effects of a New Currency

Abstract The coexistence of fiat money (cash) and digital monies constitutes a system of parallel currencies as media of exchange. This paper asks whether a new (digital) currency is essential: Does a new currency allow for a better resource allocation even if a fully accepted currency is in circulation and remains in circulation? Using the dual currency search model of Kiyotaki and Wright (1993. A search-theoretic approach to monetary economics. Am. Econ. Rev. 83: 63–77), we show how the introduction of a secondary currency affects average utility. There is some scope for a welfare improvement as the welfare effect depends on differences in returns and costs, and, in particular, on the proportion of cash traders who will be replaced by digital money traders.