Quotes from “Currency Competition, Network Externalities, and Switching Costs”

By Kevin Dowd & David Greenaway (1993)

• It seems to be a well-established ‘stylised fact’ that a currency has to perform very poorly indeed – to be more precise, it must inflate very rapidly – to induce its widespread abandonment in favour of some other currency. A related ‘stylised fact’ is that though it is reduced, the demand for a currency is often still quite substantial even when it hyperinflates. . . . If rapid inflations produce only limited substitution towards other currencies, the monetary authorities can ‘get away’ with a great deal of monetary ‘misbehaviour’ before the loss of market share to competing currencies poses any significant problem.#
  MoneyEconomics
• Traditional welfare analyses of inflation might be misplaced because they typically use a representative agent approach that ignores the network externalities involved in the use of a particular currency. . . . [T]raditional welfare triangles of the economic costs of inflation then give way to welfare rectangles that could be much larger, and we might at last be able to explain why the ‘established’ welfare losses of inflation are so low and yet most monetary economists continue to treat inflation as a serious problem. Network externalities might be the key to the economic costs of inflation.#
  EconomicsMoney