Multiple currencies: Need to Weigh the Costs and Benefits
Multiple currencies protect consumers fromthe inflation tax if their monetary authority is unable to keep inflation low. They impose discipline on the monetary authority and can be used as a commitment device to signal an intention to keep inflation low. Multiple currencies also reduce the ability of a country’s monetary authority tosmoothfluctuations,however, and can reduce the effectiveness of lender-of-lastresort policies. Because of these costs, multiple currencies are likely to circulate only in countries with a history of high and/or volatile inflation rates.