Evolutionary Dynamics of Currency Substitution

This paper examines the issues related to the competition between two currencies in an agent-based computational economic model. The economic environment is a two-country overlapping generations economy with no restrictions on foreign currency holdings. Governments of both countries nance their de cits via seignorage. Agents make decisions about their savings and portfolio decisions. They use the genetic algorithm to update their decision rules. The results presented in the paper show that the currency of the country that nances larger of the two de cits becomes valueless. The adjustment process is characterized by a ight away from the currency used to nance the larger of the two de cits. The economy converges to a stationary equilibrium that corresponds to a single-currency economy. JEL classi cation: D84; E42; F31