Abstract
This paper integrates theory and experiments to explore how policy rules related to government interventions can affect economic allocations and the international status of a currency. Using a two-country, two-currency search model, we study two types of government interventions: (1) legal restrictions impacting a seller's ability to accept a foreign currency, and (2) reductions to the cost a seller must pay to accept a foreign currency. The first intervention can be viewed as a way to capture a decrease in capital controls, while the second can be viewed as a way to explore the impact of reducing information costs associated with using a foreign currency. Our results indicate that abolishing legal restrictions that impact a seller's ability to accept a foreign currency can increase both quantities traded and the number of trades involving two types of currencies. Additionally, the international status of currencies is significantly enhanced when sellers face very low foreign currency acceptance costs.
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