A Search Theoretic Model of Legal and Illegal Currency

Using a search theoretic model of money, we explore the conditions under which two currencies, domestic and foreign, will co-exist depsite legal restrictions on the use of foreign currency for internal trade. We then study how changes in government policy regarding enforcement of currency laws affects the equilibrium value of both currencies, the exchange rate and goverment seigniorage revenues. In our one country, two currency model, we show that there are multiple monetary equilibria.