Local currency as a development strategy

The introduction of a local currency may serve as a signal of demand

for local goods. Where demand uncertainty deters firms from

investing in more productive technologies, such a signal improves the

chances that technology choice will be optimal. The introduction of

a local currency therefore always improves ex-ante efficiency and may

lead to ex-post efficiency, with strictly higher levels of productivity

and welfare.

Section II presents the basic model. Section III considers the equilibrium

of a game in which firms face a technology choice with demand uncertainty

in the absence of a local currency. In section IV, we analyze the equilibrium

of the game with local currency. Section V is devoted to seeing, through

an example, howthe introduction of a local currency compares to other,

more traditional, policies directed at demand revelation. Finally, section VI

concludes.

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