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Working Papers (1997), ESSEC Business School

Effects of Currency Unit Substitution in a Search Equilibrium Model

BESANCENOT D., ROCHETEAU G., VRANCEANU Radu

This paper develops a search equilibrium model to explore the economic consequences of a currency reform which makes use of a decimal conversion rate. It is assumed that in the short run consumers keep on using the former reservation prices, expressed in the old currency. In order to make their buying decision, they must therefore convert the new displayed prices into the old currency. Agents differ in their ability to calculate the correct price. Firms may attempt to discriminate between consumers in keeping with their individual heuristic conversion rates. As a consequence of this price distribution, consumers engage in a time-consuming search process. The post-reform equilibrium may involve a different price disribution, changes in the activity level and in the surplus of the various types of consumers.

BESANCENOT, D., ROCHETEAU, G. and VRANCEANU, R. (1997). Effects of Currency Unit Substitution in a Search Equilibrium Model. ESSEC Business School.