Electronic Money and the Optimal Size of Monetary Unions
The question is how the advent of electronic money affects the size of optimal currency areas. In particular, we study whether currencies of small countries will tend to disappear as a result of electronic money. The three major forces that will be at work during the transition to a cashless society have different implications for the question at hand. These forces are (a) raising the potential for financial instability during the transition, (b) giving rise to new monetary network externalities that affect the costs and benefits of national media of exchange, and (c) leading to the emergence of new stores of value.
Keywords: currency competition, electronic money, financial instability, network externalities, optimal size of monetary unions, transaction costs
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