International Journal of

Community Currency Research

Volume 16 (2012) Section A 45 - 56
ARE ALTERNATIVE CURRENCIES A SUBSTITUTE OR
A COMPLEMENT TO FIAT MONEY? EVIDENCE
FROM CROSS-COUNTRY DATA
Damjan Pfajfar*, Giovanni Sgro**, And Wolf Wagner *
*European Banking Center, Tilburg University
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This papei stuuies the ueteiminants of the usage of alteinative cuiiencies (cuiiencies which
exists paiallel to the national cuiiency of a countiy) acioss countiies. We finu that monetaiy
stability, financial sectoi uevelopment anu a countiy's geneial level of economic uevelopment
aie all positively ielateu to both the likelihoou of a countiy hosting an alteinative cuiiency as
well to the numbei of alteinative cuiiencies a countiy is hosting. This suggests that these cui-
iencies, in contiast to theii histoiical function, mainly act as a complement to fiat money. We
uiscuss the implications foi the iole of fiat money in the economy as well as foi the welfaie ef-
fects of alteinative cuiiencies.
* E-mail: B.Pfajfaiuvt.nl
$' )*+, +-*. /0+*)1,2 Pfajfai, B., Sgio, u. anu Wagnei, W. (2u12) 'Aie Alteinative Cuiiencies oi a Complement
to Fiat Noney. Eviuence fiom Cioss-Countiy Bata' )#*+(#"*,'#"- 1'2(#"- '& 3'//2#,*4 32((+#54 6+0+"(57 16
(B) 4S - S6 <www.ijcci.net> ISSN 1S2S-9S47
34 56$%789&$576
A countiy's national cuiiency (fiat money) is typically its
uominating means of exchange. Stanuaiu monetaiy theoiy
suggests that as such it has to fulfill thiee uiffeient impoi-
tant functions: it has to act as a means of payment, to seive
as a unit of account, anu to be a stoie of value.
Suipiisingly, little is known about whethei fiat money
aiounu the woilu fulfills these functions well. 0ne may
aigue that the fact that it is the uominating foim of money
alone inuicates that fiat money fulfills its iole sufficiently
well as otheiwise (self-inteiesteu) economic agents woulu
tiaue using alteinative foims of money. Bowevei, theie aie
pioblems with this aigumentation. Economic agents may
simply not switch to othei cuiiencies uue to cooiuination
pioblems (theie aie netwoik effects fiom auopting a new
foim of money). In auuition, goveinment legislation favois
fiat money ovei othei foims of money, thus effectively in-
uucing agents to accept it as a main means of exchange
(even though bettei foims of money may exist). It might
also be that economic agents inueeu piefei fiat money
oveiall but that actually one specific function is bettei
seiveu by an alteinative foim of money. Foi example, fiat
money may be an efficient means of account anu exchange
uue to its wiuespieau pievalence but not a stoie of value as
goveinments have incentives to inflate.
In iecent yeais we have seen an inciease in alteinative
cuiiencies (ACs) aiounu the woilu. Foi example, the num-
bei of oiganizations issuing ACs has incieaseu fiom 2u in
1992 to 224 by miu 2u11 accoiuing to the uatabase of
Complementaiy Cuiiency Resouice Centei. Alteinative
cuiiencies iefei to unofficial cuiiencies that exist paiallel
to the national cuiiency anu which can exist foi a vaiiety of
stateu puiposes. A common element, howevei, is that they
aie often establisheu on a local oi iegional level, backeu by
some foim of local inteiest gioup, such as piivate nonpiofit
oiganizations, small businesses oi local institutions. Repie-
sentative examples foi such cuiiencies aie the Ithaca-
houis, the Toionto Bollai anu the WIR-bank. Bistoiically,
the cuiiencies spiing whenevei fiat money is not peifoim-
ing its functions. Foi example, uuiing the ueiman Bypeiin-
flation of the 192us many cities intiouuceu so-calleu Not-
gelu (emeigency money) which aiguably helpeu to allevi-
ate pioblems causeu by inflation in the affecteu iegions.
1

Anothei example is the emeigence of tiauing coupons
when ciiculation of national fiat money is iestiicteu. The
liteiatuie on alteinative cuiiencies has hence laigely fo-
cuseu on a substituting iole of these cuiiencies.
2
The inciease in the numbei of alteinative cuiiencies may --
at fiist -- suggest that national cuiiencies aie somewhat
less successful in fulfilling the thiee coie functions of
money, anu that as a iesult agents aie substituting them
(paitly) foi alteinative cuiiencies.
S
This aiguably was the
case in the 192us when alteinative cuiiencies gaineu in
impoitance because inflation unueimineu the iole of offi-
cial cuiiencies as a stoie of value anu unit of account. An-
othei potential explanation foi the incieasing populaiity of
alteinative cuiiencies is a peiceiveu ueteiioiation in insti-
tutional quality, oi a ieuuction in the effectiveness of the
financial system. Foi example, if agents believe theie is a
iisk of a cuiiency iefoim, they may be less likely to see fiat
money as a ieliable stoie of value. Likewise, ieuuceu tiust
in the establisheu financial system will equally ieuuce the
appeal of stoiing money using this system, hence ieuucing
its oveiall uemanu. In auuition, if access to money is not
wiuespieau (foi example uue to a lack of an extensive bank
bianch netwoik in iuial aieas anu in ueveloping coun-
tiies), agents may stait to accept alteinative foims of pay-
ments.
The key competing explanation is that alteinative cuiien-
cies act as a complement to national cuiiencies. Foi exam-
ple, in uevelopeu countiies alteinative cuiiencies may not
seive to substitute foi a less well functioning of fiat money
but iathei to puisue objectives beyonu the coie functions
of money, such as piomoting local business inteiests oi
fuitheiing specific local causes (e.g., the piomotion of cei-
tain activities anu the piomotion of a community spiiit).
This papei attempts to sheu some light on these questions
by stuuying the ueteiminants of alteinative cuiiencies. Foi
this we use an inteinational sample on the usage of alteina-
tive cuiiencies acioss 76 countiies. The main basis of this
uataset is the uatabase of Complementaiy Cuiiency Re-
souice Centei, which uocuments alteinative cuiiency pio-
jects aiounu the woilu. We use the infoimation fiom this
uatabase to ask the question if (anu which) factois ielateu
International Journal Of Community Currency Research 2012 Volume 16 (A) 45-56 Pfajfar Et. Al
46
1
In the Niiacle of Woigl, a town in Austiia intiouuceu sciip money uuiing the uieat Bepiession. This iesulteu in giowth anu a ieuuction in
unemployment in the iegion, uefying the uepiession in the iest of the countiy. The expeiiment was latei teiminateu by the Austiian Cential
Bank on the basis of being a thieat to the bank's monopoly foi piinting money. A ielateu, but not necessaiily oveilapping, concept is the one
of Schwunugelu auvocateu by uesell (19u6). uesell positeu that inteiest on money is unuesiiable as it uiscouiages spenuing anu leaus to
money hoaiuing. Be insteau pioposeu to intiouuce uemuiiage money, i.e. money that uepieciates automatically (foi example because each
month the face value is ieuuceu by a ceitain fiaction).
2
Alteinative cuiiencies may also have a iole to play in the cuiient situation in uieece, see Sotiiopoulou (2u11) anu Sotiiopoulou (21u2).
S
Seveial papeis have shown that theie is a iole foi uual-cuiiencies. Ales et al (2uu8) anu Ciaig anu Wallei (2uuu, 2uu4) pioviue seaich-
baseu mouels of seconu cuiiencies. Cavalcanti anu Wallace (2uuS) shows that a iole foi piivate money aiises if theie aie commitment piob-
lems in the economy. Nacioeconomic iepeicussions of uual cuiiencies aie uiscusseu, among otheis, in Calvo anu vegh (1992).
to the functions of money on a countiy level ueteimine the
usage of alteinative cuiiencies.
Fiom oui empiiical investigation a cleai pictuie emeiges:
alteinative cuiiencies aie a complement iathei than sub-
stitute foi fiat money. Fiist, inuicatois of monetaiy stability
(e.g., low inflation, low money giowth, low piices volatility)
all aie associateu with a highei usage of alteinative cuiien-
cies. These inuicatois aie impoitant pioxies foi potential
inauequacies in money's iole as a unit of account oi stoie
of value. Inuicatois of uevelopment of the financial system
(e.g., numbei of bank bianches, cieuit availability in the
economy, shaie of non-peifoiming loans) likewise inciease
usage of alteinative cuiiencies. In auuition, pioxies foi
oveiall uevelopment of a countiy (e.g., uBP pei heau, low
business cycle volatility, inteinet usage) also go along with
highei usage of alteinative cuiiencies. The iesults aie io-
bust to the econometiic methou useu anu holu both foi the
likelihoou of a countiy hosting an alteinative cuiiency as
well as the numbei of alteinative cuiiencies in a countiy.
4
To some extent a complimentaiy iole foi alteinative cui-
iencies constitutes a puzzle. It is uifficult to conceive how
they can pioviue a substantial value auueu ovei fiat money,
especially with iespect to the stoie of value anu unit of
account function. These cuiiencies aie peggeu with a fixeu-
iate against the national cuiiency anu hence will be equally
subject to uevaluation aiising fiom inflation. What then
about the function as a means of payment. The usage of
these alteinative cuiiencies is typically local, anu often
expiessly so (e.g., the stateu motive foi setting up the cui-
iency may be piomoting the local economy oi a peicentage
of sales may be useu to fuithei local causes), hence theii
appeal as a means of exchange is iestiicteu. Taken to-
gethei, fiom the viewpoint of an inuiviuual theie uo not
seem to be any uiiect benefits fiom using these cuiiencies:
eveiything which can be uone with alteinative cuiiencies
can equally well be uone by national cuiiencies.
Bowevei, alteinative cuiiencies potentially pioviue bene-
fits to the local economy in the aggiegate by cieating an
asymmetiic system foi means of exchanges: local agents
who aie enuoweu with the alteinative cuiiency face lowei
costs of spenuing theii income in theii iegion as opposeu
to othei iegions, which will seive to inciease local uemanu.
At the same time, alteinative cuiiencies uo not uetei ue-
manu fiom othei iegions, as local shops will still accept fiat
money. Local cuiiencies may thus seive as a commitment
mechanism to oveicome fiee-iiuing pioblems: each agent
may inuiviuually finu it optimal to spieau hei puichases
acioss the countiy as she uoes not fully inteinalize the
benefits foi the local community when spenuing locally.
The iegion as a whole may be bettei off if its inhabitants
spenu locally anu community cuiiencies may seive as a
mechanism to uo so.
This inteipietation of local cuiiencies has an inteiesting
implication foi welfaie. Local cuiiencies uo not affect wel-
faie (as one may have expecteu a piioii) by unueimining
fiat cuiiency, but because they impose exteinalities on
othei iegions (i.e., by loweiing uemanu theie). Theii emei-
gence may thus be uetiimental foi the oveiall economy. Foi
example, suppose that theie aie two iegions in a countiy
which both (inuepenuently) intiouuce theii own alteina-
tive cuiiency peggeu to the legal tenuei money at a fixeu
exchange iate. Aggiegate uemanu in this case shoulu be
unaffecteu because the effects in each iegion cancel out.
Still the economy oveiall faces auuitional costs as theie will
be some ueauweight losses fiom using the alteinative cui-
iency.
The iemainuei of this papei is stiuctuieu as follows. The
next section uesciibes the usage of alteinative cuiiencies
fiom a histoiical peispective anu theii cuiient usage anu
also uiscusses some iecent ieseaich on ACs. The following
section contains the empiiical iesults, baseu on cioss-
countiy piobit, oiueieu logit anu poisson iegiessions. The
final section concluues.
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Nultiple cuiiencies have thioughout histoiy aiisen in cii-
cumstances wheie the legal tenuei was no longei pioviuing
its functions well. In these cases, the maiket mechanism leu
to the emeigence of seconuaiy cuiiencies that alloweu foi
some (oi all) of the functions of money without imposing
unuue auuitional costs.
A well-known example in mouein histoiy is Fiance in the
afteimath of the Revolution. Staiting in 179u a seiies of
papei money uevaluations leu to olu silvei anu golu coins,
along with some othei foieign metal cuiiencies, to be useu
in eveiyuay's life. This was uespite the fact that anyone
iefusing payments in the official bills coulu be piosecuteu
by Fiench law. The so-calleu Louis u'0i, the Fiench coin
nameu aftei Louis XIII, was actively useu in the maiket
thioughout the entiie ievolutionaiy peiiou (see White,
19SS). Buiing 179S anu 1796 the papei Fianc uepieciateu
against the Louis u'0i by 87% in just six months anu effoits
of the authoiities to enfoice exchange with the legal tenuei
was laigely unsuccessful.
Alteinative cuiiencies also playeu a significant iole uuiing
the ueiman hypeiinflation. Piioi to the intiouuction of the
Rentenmaik in 1922, foieign exchange, olu metallic coins
anu piivately issueu cuiiencies hau ieplaceu the official
cuiiency in all of its functions. The most impoitant inuus-
tiies staiteu to expiess theii piices in foieign cuiiencies oi
golu maiks. This leu to the issuance of Notgelu ("emei-
gency money"). Its amount giew so uiamatically that iegu-
lations iestiicting its issuance weie implementeu. Bow-
International Journal Of Community Currency Research 2012 Volume 16 (A) 45-56 Pfajfar Et. Al
47
4
Alteinative cuiiencies aie conceivably moie likely to be a substitute foi fiat money in ueveloping countiies as in these countiies fiat money
is fulfilling its iole less well. We thus examine whethei at least within the gioup of ueveloping countiies alteinative cuiiencies act as a substi-
tute, which is not the case.
evei, in many cases the issueis continueu opeiating outsiue
the law. The populaiity of seconuaiy money causeu the ieal
supply of fiat money to uecline - even though its nominal
quantity steauily incieaseu - as ueimans weie piefeiiing
alteinative meuia of exchange. Buiing that peiiou fiat
money was iefuseu by consumeis anu businesses alike.
When the Rentenmaik was intiouuceu, it effectively uiu not
took the place of the hypei-inflateu olu papei maik, but
substituteu the vaiious alteinative cuiiencies that hau
aiisen (Biesciani-Tuiioni (19S1)).
An impoitant iole foi the auvancement of alteinative cui-
iencies was playeu by the ueiman philosophei anu econo-
mist Silvio uesell. In his pamphlet The Natuial Economic
0iuei, uesell (1929) suggests intiouucing cuiiencies with
so-calleu uemuiiage oi negative inteiest. The iuea was to
impose a scheuuleu uepieciation on papei money in oiuei
to uiscouiage money hoaiuing by the saveis.
S
uesell's ue-
pieciating money pioposal was latei iefineu by Iiving
Fishei (19SS). Fishei expiesseu the opinion that a key iea-
son behinu economic stagnation is the fact that consumeis
avoiu spenuing. Be suggests a mechanism similai to ue-
muiiage with the aim to boost the speeu of ciiculation of
the cuiiency anu ultimately to stimulate economic activity.
Fishei suggests local sciip money, papei money ieueem-
able in legal tenuei but with an expiiation uate aftei which
it has to be conveiteu into the official cuiiency. A sciip bill
woulu have a ieveise siue uiviueu into cells. This allows the
holuing of money to be taxeu by stamping cells at, say, anu
weekly fiequency. Stamping woulu be iequiieu foi the
holuei of the bill to be able to latei exchange the bill.
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ACs can nowauays be bioauly uistinguisheu into thiee
gioups: (i) backeu cuiiencies, (ii) un-backeu cuiiencies,
anu (iii) mutual cieuit system cuiiencies (see Schiaven
(2uu4), Blanc (2u11) anu Naitignoni (2u12)). The fiist
ones aie backeu by commouities, ieal goous oi legal tenuei
money, foi which they can be exchangeu at a fixeu fee. In
the gieat majoiity they aie fully conveitible to the official
cuiiency. The eailiei examples of complementaiy oi com-
munity cuiiencies fell into this categoiy. 0nbackeu cuiien-
cies aie typically tieu to the piovision of some seivices
(e.g., baby sitting) oi simply one houi of laboui (e.g., the
Ithaca Bouis cuiiency). Nutual cieuit systems aie the most
common categoiy of ACs nowauays. A pievalent foim of
such systems is !"#$% '(#)$*+, -.$/0*+ 1234,53 (LETS)
netwoiks. These netwoiks essentially iepiesent an alteina-
tive payment club; theie is no initial stock of cash in the
system. They incoipoiate a cential (automatic) cleaiing
mechanism which allows inuiviuual accounts to go in uebt
oi cieuit. An inuiviuual account outstanuing balance can
then be tiaueu insiue the netwoik. The geneial iuea behinu
LETS is to tiansfoim woiking time (often of unskilleu
laboui) into uiiect puichasing powei.
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ACs can be useu as an alteinative to fiat money when the
lattei is, foi whatevei ieason, not fulfilling its functions
piopeily. Foi example, the iole of fiat money may be un-
ueimineu in the piesence of significant inflation oi because
of a cuiiency shoitage (which can aiise when money is
backeu by a scaice commouity). ACs can also be useu as a
means to accommouate macioeconomic imbalances. When
it tenus to be auopteu in situations of (fiat) money scaicity,
it seives to (enuogenously) mouify the elasticity of money
supply. It can also countei inflationaiy tenuencies by in-
uucing inuiviuuals to switch to (moie stable) AC whenevei
fiat money is losing value. AC (in paiticulai in the foim of
LETS) can also mitigate cieuit constiaints foi small anu
meuium-size enteipiises anu utilize unskilleu laboi to a
gieatei extent. 0n the uownsiue, ACs aie often useu as a
local policy instiument. As such AC have a potentially pio-
tectionist iole in uiveiting tiaue to a netwoik oi iegion.
Economic ieseaich has so fai paiu little attention to the
alteinative cuiiency phenomenon. 0ne ieason foi this is
suiely that these moneys aie often aiiangeu by ielatively
small communities anu with iathei uiffeient puiposes. The
chaiacteiistics of these moneys also uiffei wiuely, making it
uifficult to uiaw geneial infeiences. Bowevei, spuiieu by
the iapiu giowth of oiganizations that offei such cuiien-
cies in iecent yeais, theie has been an intensifieu inteiest
in alteinative cuiiencies. Stouuei (2uu9) analyzes the WIR
cieuit netwoik in Switzeilanu that was establisheu in ie-
sponse to cuiiency shoitages aftei the 1929 stock maiket
ciash. It only exists as a bookkeeping system anu its aim is
to seive small anu meuium-sizeu businesses. Stouuei
(2uu9) pioviues eviuence of the counteicyclical effect of
the WIR system: the netwoik extenus whenevei inuiviuual
aie cash-shoit such as in iecession (anu vice veisa). It thus
appeais to have smootheu the business cycle fluctuations
in Switzeilanu. Stouuei suggests that cieuit netwoiks
shoulu hence be geneially taken into account by monetaiy
policy. Colacelli anu Blackbuin (2uu9) stuuy the baitei
clubs of #.6/04"7 which playeu a significant iole in Aigentina
uuiing the financial meltuown in 2uu2. 0sing suivey uata
they investigate the ueteiminants of theii acceptability as
seconuaiy cuiiency. They finu that the uegiee of accept-
ability incieases when local money supply is low, when the
ielative tiansaction costs of the seconuaiy cuiiency ue-
ciease anu when inuiviuual tiauing technologies aie less
effective. Colacelli anu Blackbuin also finu that the usage of
alteinative cuiiencies has a sizeable impact on economic
activity: inuiviuuals who use these cuiiencies gain about
1S% of the aveiage income in the countiy. 0ui stuuy com-
plements theii ieseaich by looking at the cioss-countiy
vaiiation of ACs; showing that besiue micio-level ueteimi-
nants (which aie consiueieu in Colacelli anu Blackbuin)
the spieau of ACs is also heavily ueteimineu by mac-
ioeconomic factois. Rosl (2uu9) focuses on iegional cui-
iencies in ueimany anu uemonstiates that theie aie wel-
faie losses associateu with local systems of payments. Be
asseits that iegional cuiiencies peifoim woise than the
legal tenuei unuei all functions of money. Be concluues
that such local meuia of exchange cannot be explaineu by
cuiiency substitution mouels anu suggest they shoulu be
consiueieu as luxuiy-goous. This is consistent with oui
cioss-countiy finuings in that the emeigence of alteinative
cuiiencies uoes not seem to be motivateu by a uesiie to
ieplace fiat money. Alteinative cuiiencies may also have
social effects. In paiticulai, Nakazato anu Biiamoto (2u12)
International Journal Of Community Currency Research 2012 Volume 16 (A) 45-56 Pfajfar Et. Al
48
S
A uiscussion of the impact of uemuiiage foi alteinative cuiiencies can be founu in uouschalk (2u12).
finu community cuiiencies pioviue social benefits by in-
cieasing usei awaieness.
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&5<#2 <>L5%5&!; !6!;M#5#
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We gathei infoimation on alteinative cuiiencies fiom the
online uatabase of the Complementaiy Cuiiency Resouice
Centei (wheie necessaiy we also consulteu auuitional web
iesouices). This uatabase pioviues infoimation on AC oi-
ganizations aiounu the woilu. It incluues vaiious types of
ACs, such as iegional cuiiencies, local exchange anu tiau-
ing system, baitei clubs, commouity monies. Foi each cui-
iency in the uatabase we ietiieve the countiy in which it is
baseu.
0ui aim is to stuuy whethei economic chaiacteiistics can
explain the pievalence of ACs. We uo not uiffeientiate
among the vaiious types of ACs anu thus examine the im-
poitance of ACs in geneial. We use thiee alteinative ways
to measuie ACs in a countiy. Fiist, a simple uummy vaii-
able which takes the value one if theie is at least one AC in
a countiy, anu zeio otheiwise. Seconu, a count vaiiable that
inuicates the numbei of ACs in a countiy. Thiiu, in oiuei to
auuiess skewness in the uistiibution of the ACs (theie aie
few countiies that have a laige numbei of ACs) we uefine
an oiuinal vaiiable that measuies the impoitance of altei-
native cuiiencies. This vaiiable takes the value of S if a
countiy has moie than 1S ACs, 4 if the numbei of ACs is
between 11 between 1S, S if the numbei of ACs is between
6 anu 1u, 2 if the numbei of ACs is between S anu S, 1 if the
numbei of ACs is between 1 anu 2, anu u otheiwise.
We consiuei a wiue set of factois that may ueteimine
whethei an enviionment is conuucive to ACs. Fiist, we con-
siuei some basic countiy chaiacteiistics, such as ieal uBP
pei capita, (log of) population anu whethei the countiy is a
feueial union. Seconu, we consiuei inuicatois of monetaiy
stability anu monetaiy policy in a countiy. Foi this we in-
cluue an inflation measuie (aveiage CPI inflation ovei the
last five yeais), money giowth (five-yeai aveiage of N2),
inflation volatility (aveiage five-yeai stanuaiu ueviation of
CPI inflation), money velocity (the iatio of uBP to N2) anu
a shoit-teim inteiest iate (S-yeai aveiage of S-6 month
inteiest iates). Thiiu, we incluue measuies of business
cycle chaiacteiistics in the uataset. Foi this we take avei-
age uBP giowth (S-yeai aveiage of the giowth iate of uBP)
anu business cycle volatility (uefineu as the aveiage stan-
uaiu ueviation of the uBP giowth ovei the last S yeais).
Fouith, we also consiuei vaiious measuies of financial ue-
velopment of a countiy. We incluue uomestic cieuit (uo-
mestic cieuit to piivate sectoi excluuing the goveinment as
peicentage of uBP), bank bianch intensity (numbei of
bianches of commeicial banks pei 1uu,uuu inhabitants),
stock maiket capitalization (uefineu as the total value
tiaueu on the stock exchange) anu the fiaction of non-
peifoiming loans at banks. Finally, we incluue the following
othei countiy chaiacteiistics: a uummy vaiiable which
takes the value of one if the national cential bank is in
chaige of the monetaiy policy anu the cuiiency supply anu
of zeio if insteau the countiy is pait of a monetaiy union oi
is bounu to a cuiiency boaiu anu similai (as a pioxy foi the
activism of the monetaiy institutions), a measuie of a coun-
tiy's openness (measuieu by the iatio of the sum of im-
poits anu expoits to uBP) anu the pievalence of inteinet
usage (peicentage of people with access to the net).
Nost of the vaiiables aie collecteu fiom the Woilu Bevel-
opment Inuicatois statistics of the Woilu Bank. Nonetaiy
uata anu inteiest iates aie taken fiom the INF Bata Statis-
tics anu the ECB Statistical Bata Waiehouse. The uata on
the uomestic cieuit anu the stock maiket aie fiom the Fi-
nancial Stiuctuie Bataset by the Woilu Bank (See Beck et
al., 1999). The souice of the banking sectoi vaiiables is the
uataset on banking seivices by Beck et al. (2uu7).
All vaiiables aie taken fiom 2uu7 oi the most iecent in-
foimation available befoie that uate. 0ui final sample con-
sists of 76 countiies, of which S1 host at least one alteina-
tive cuiiency. Fuitheimoie, the iegions with the most AC
countiies aie Euiope (1S) anu in Ameiica (8). In Asia,
0ceania (Austialia anu New Zealanu) anu Afiica theie aie
S, 2, anu 1 countiy(s) that have an alteinative cuiiency,
iespectively. The fiequency of countiies that have AC is the
highest in 0ceania (1uu%) anu Ameiica (SS%), followeu by
Euiope with 4S% anu Asia with SS%. Alteinative cuiien-
cies in Afiica aie quite iaie: only one out of 11 Afiican
countiies has an alteinative cuiiency.
Looking at the numbei of AC gives the following pictuie.
Nost ACs aie in Euiope (SS) anu Ameiica (42). The highest
intensity of ACs pei countiy is in 0ceania (about 7.S pei
countiy), the 0.S. (2.8 pei countiy) anu Euiope (1.6 pei
countiy). The ielatively lowei fiequency of ACs in uevelop-
ing countiies may ieflect that seignoiage is ielatively moie
impoitant foi these countiies -- ACs coulu potentially
thieaten this ievenue -- thus the goveinment might moie
actively fight to pievent theii spiing (see Calvo anu vegh,
1992).
H4:4 EML7$E<#<#
There are two broad set of hypotheses for how alternative cur-
rencies depend on macroeconomic factors, depending on
whether such currencies are a substitute or complement to fiat
money.
!1+,0A/+*G, )?00,A)*,. /0, / .?N.+*+?+, +' O*/+ D'A,B
If alteinative cuiiencies substitute foi fiat money, the bene-
fits fiom intiouucing such cuiiencies shoulu be the highest
when fiat money uoes not peifoim its function veiy well.
This shoulu fiist be the case when theie is an inflationaiy
enviionment anu when monetaiy policy is geneially unsta-
ble as in this case holuing fiat money is less attiactive. Sec-
onu, the benefits fiom fiat money aie geneially low (anu
thus the ielative benefits fiom ACCs high) when the coun-
tiy is less uevelopeu financially. In such cases, access to anu
usage of fiat money may be ielatively costly (foi example,
in iuial aieas with no bank bianches). Thiiu, in countiies
International Journal Of Community Currency Research 2012 Volume 16 (A) 45-56 Pfajfar Et. Al
49
that aie less stable economically, theie is a highei pei-
ceiveu likelihoou of bieakuown of the political anu mone-
taiy system, also incieasing the benefits fiom alteinative
cuiiencies. This leaus to the following hypothesis:
EB@'+-,.*. 32 89 $%4,.*$40:, #;..,*#0,3 $., $ 3;<3404;4, 4"
=0$4 5"*,27 >, >";%/ ,(?,#4 4), %0@,%0)""/ "9 ABB $/"?40"*
4"
0C 0*#.,$3, 0* 0*/0#$4".3 "9 0*=%$40"*$.2 ?.,33;., $*/ 0*34$<0%D
042 "9 5"*,4$.2 ?"%0#27
00C /,#.,$3, 0* =0*$*#0$% 3,#4". /,:,%"?5,*47
000C 0*#.,$3, 0* ,#"*"50# 34$<0%042E
!1+,0A/+*G, )?00,A)*,. /0, / )'D@1,D,A+ +' O*/+ D'A,B
If, on the othei hanu, alteinative cuiiencies complement
fiat money, its usage shoulu be moie wiuespieau piecisely
when fiat money peifoims its functions well. This leaus to
exactly opposite pieuictions as in Bypothesis 1:
EB@'+-,.*. :2 89 $%4,.*$40:, #;..,*#0,3 $., $ #"5?%,5,*4 4"
=0$4 5"*,27 >, >";%/ ,(?,#4 4), %0@,%0)""/ "9 ABB $/"?40"*
4"
0C /,#.,$3, 0* 0*/0#$4".3 "9 0*=%$40"*$.2 ?.,33;., $*/ 0*34$<0%D
042 "9 5"*,4$.2 ?"%0#27
00C 0*#.,$3, 0* =0*$*#0$% 3,#4". /,:,%"?5,*47
000C /,#.,$3, 0* ,#"*"50# 34$<0%042E
7+-,0 -B@'+-,.,.
If theie aie some fixeu costs to ACC auoption, we woulu
expect the likelihoou of theii auoption to vaiy with the
economic aiea they aie able to seive. Thus, ACC auoption
shoulu inciease with measuie of population anu uBP. Sec-
onu, in countiies with moie political heteiogeneity, theie
may be a highei neeu foi local cuiiencies that complement
nationwiue money. We woulu thus expect ACCs to be moie
wiuespieau in uecentializeu countiies. Finally, many of the
alteinative cuiiencies in oui uatabase aie inteinet-baseu.
Access to them is such easiei in countiies with moie pieva-
lent inteinet usages. This leaus to the following auuitional
hypothesis:
EB@'+-,.*. H2 F, ,(?,#4 4), %0@,%0)""/ "9 ABB $/"?40"* 4"
0C 0*#.,$3, 0* ?."(0,3 "9 4), 30G, "9 4), ,#"*"50# $.,$ 4),2
#$* 3,.:,7
00C <, )0+),. 0* 9,/,.$% #";*4.0,37
iii) 0*#.,$3, 0* 4), 0*4,.*,4 $##,33E
H4H4 %,.?1+.
Foi oui baseline iegiessions we focus on explaining
whethei a countiy hosts an AC oi not. 0ui uepenuent vaii-
able is thus a uummy that inuicates that a countiy has at
least one AC (in Section iobustness we iepoit the iesults
foi the numbei of ACs anu the oiuinal AC vaiiable). Table 1
iepoits iesults fiom Piobit iegiessions. All coefficients aie
expiesseu as maiginal effects. They thus iepiesent the im-
pact of a maiginal change in an inuepenuent vaiiable on
the pieuicteu piobability of hosting an AC, assuming that
all othei inuepenuent vaiiables aie at theii iespective
means.
The stanuaiu contiols in the iegiessions in Table 1 aie uBP
pei capita, population anu the feueial uummy. The vaiious
iegiessions iepiesent vaiious subset of contiols: columns
1 to S analyze monetaiy inuicatois, columns 6 to 7 business
cycle measuies, columns 8 to 11 financial uevelopment
inuicatois anu columns 12 to 14 vaiious othei contiols.
The iesults foi the main contiol vaiiables tuin out to be
iobust acioss all the specifications wheie they aie in-
cluueu. uBP pei capita is positively anu significantly ie-
lateu to the likelihoou of a countiy hosting an alteinative
cuiiency. Alteinative cuiiencies aie thus moie pievalent in
iichei countiies. This seems plausible since it takes ie-
souices anu time to builu up an alteinative cuiiency. The
iegiessions also show that population is positively anu
significantly ielateu to ACs. This is to be expecteu since
theie is a highei potential foi an alteinative cuiiency in a
countiy with moie inhabitants. The thiiu contiol vaiiable,
the uummy foi whethei the countiy is a feueial one, is also
positively anu significantly ielateu to the uepenuent vaii-
able. Feueial countiies aie thus moie likely to host alteina-
tive cuiiencies. An explanation foi this is that most of these
cuiiencies aie of iegional natuie anu theie is less potential
foi staiting up an inuepenuent iegional cuiiency in a coun-
tiy with a highei centialization.
We now tuin to the contiols that give infoimation about
monetaiy stability anu monetaiy policy in a countiy. Bue to
multicollineaiity conceins among the contiols, we always
incluue one contiol vaiiable at a time. Column 1 consiueis
the ielationship between CPI inflation anu the likelihoou of
hosting an alteinative cuiiency. Theoietically, this iela-
tionship is ambiguous. 0n the one hanu, a high inflation
iate unueimines all the thiee functions of money (means of
payment, unit of account anu stoie of value). This shoulu
inciease the attiactiveness of an alteinative cuiiency. In
fact, uuiing vaiious episoues in histoiy alteinative cuiien-
cies weie intiouuceu in oiuei to escape the uevaluation of
fiat money, such as in ueimany anu Austiia uuiing the time
of the ueiman hypeiinflation. 0n the othei hanu, a high
inflation iate may inuicate instability in a countiy, making
it less likely that economic agents finu time to founu altei-
native cuiiencies. Column 1 shows that the ielationship
between the inflation iate anu the uepenuent vaiiable is
negative anu significant. Thus, AC aie moie likely in coun-
tiies wheie fiat money piobably fulfills its iole well (i.e.,
uue to a low inflation iate). This suggests that ACs aie
complementing fiat money.
Column 2 consiueis an alteinative pioxy foi inflation:
money giowth. This iegiession confiims the pievious ie-
sults, showing that highei money giowth is associateu with
a lowei pievalence of ACs. Column S then examines the
impact of inflation volatility. The iationale behinu this is
International Journal Of Community Currency Research 2012 Volume 16 (A) 45-56 Pfajfar Et. Al
50
that it is often aigueu that inflation by itself uoes not in-
uuce substantial costs -- as long as it is pieuictable. Bow-
evei, when inflation is volatile, ielative piices in the econ-
omy aie likely to be uistoiteu when inflation expectations
aie not fulfilleu. The iegiession shows that this pioxy of
monetaiy stability is negatively anu significantly ielateu to
the uepenuent vaiiable. Taken togethei, these iesults coi-
ioboiate the finuing that ACs aie not substituting foi a
countiy's national cuiiency as they aie moie likely to be
set up in an enviionment wheie the national cuiiency pei-
foims well.Column 4 consiueis the velocity of money. A
high money velocity may be uue to inflationaiy expecta-
tions as agents tiy to spenu money as quickly as possible. It
may also inuicate a highly uevelopeu financial system in
which the stock of money can be tuineu ovei moie quickly.
Bowevei, column 4 iepoits that theie is no statistical evi-
uence that the velocity of money ciiculation affects the
likelihoou of ACs. Column S then consiueis (nominal) in-
teiest iates. Again, high nominal iates may be inuicative of
inflation oi inflation expectations. They also may pioxy the
stage of a countiy in the business cycle, as inteiest iates aie
typically piocyclical. Yet, column S shows that inteiest
iates aie not significantly ielateu to ACs.
We next examine inuicatois of the business cycle peifoim-
ance of a countiy. Column 6 shows that aveiage uBP
giowth is significantly anu negatively associateu with the
AC piobability. This is consistent with the iuea that a key
function of alteinative cuiiencies is to piomote local eco-
nomic giowth. Piesumably, the scope foi uoing so is highei
when output is below its potential, which is moie likely to
be the case following yeais of low giowth. Column 7 shows
that business cycle volatility is negatively anu significantly
ielateu to ACs. This is consistent with the finuings concein-
ing monetaiy inuicatois that ACs aie less attiactive in vola-
tile enviionments.
The next foui columns incluue vaiious inuicatois foi the
financial uevelopment of a countiy. We fiist consiuei the
iatio of uomestic cieuit (excluuing cieuit to the geneial
goveinment) to uBP as a factoi explaining alteinative cui-
iencies. This vaiiable is a pioxy foi the sophistication of a
countiy's financial system. In auuition, a high amount of
cieuit suggests that uomestic agents aie less likely to be
subject to boiiowing constiaints. Column 8 shows that the
likelihoou of ACs is significantly highei in countiies with a
highei volume of uomestic cieuit. This inuicates that ACs
aie moie pievalent in well uevelopeu financial systems.
Since fiat money is piobably fulfilling its function in such
countiies bettei, this suggests again the ACs act as a com-
plement iathei than a substitute foi the national cuiiency.
It also suggests that theii piimaiy motivation uoes not
seem to be to alleviate financial constiaints (as alteinative
cuiiencies can be useu to suppoit lenuing). The next col-
umn looks at the impact of financial sectoi outieach, as
measuieu by the bank bianch intensity. A highei numbei of
bank bianches shoulu make it easiei foi economic agents
to use the national cuiiency (foi example, payment sys-
tems anu the possibility of cash withuiawals pioviueu by
bianches facilitate the usage of fiat money). This shoulu
make AC less attiactive -- if they aie a substitute to national
money, but moie attiactive if they aie a complement. Col-
umn 9 shows banking bianches aie positively anu signifi-
cantly ielateu to ACs, thus suggesting a complementaiy
iole foi ACs.
Column 1u consiueis an alteinative pioxy foi financial sec-
toi uevelopment: the value of the stock maiket tiauing
volume ielative to the uBP. Bigh stock maiket capitaliza-
tion suggest that it is easy foi fiims to obtain financing
thiough equity anu inuicates the absence of financing con-
stiaints in a similai way as a high uomestic cieuit volume.
Nonetheless, the iesults show that stock maiket capitaliza-
tion is not significantly ielateu to the likelihoou of a coun-
tiy hosting ACs. The final vaiiable on financial sectoi ue-
velopment we consiuei is a pioxy foi banking system qual-
ity: the shaie of non-peifoiming loans in banks' loan poit-
folios. Eveiything else equal, a highei shaie of non-
peifoiming loans inuicates that banks pioviue a lowei level
of theii scieening anu monitoiing function. The iegiession
iesults show that non-peifoiming loans aie negatively anu
significantly ielateu to the likelihoou of hosting an AC.
Again, this suggests that uevelopeu financial seivices in-
ciease the attiactiveness of ACs, confiiming the comple-
mentaiy iole playeu by these cuiiencies.
The last thiee columns of the table incluue inuicatois of
cential bank activism, countiy openness anu a vaiiable
inuicating inteinet usage in a countiy. As iegaius the fiist
vaiiable, when the uomestic cential bank is not bounu by
any exteinal constiaint as the case of monetaiy unions oi
uollaiization systems it will most likely inteivene in the
maiket moie pioactively anu possibly the uegiee of elastic-
ity of the money supply to exteinal shocks coulu be iela-
tively highei. Thus, if ACs aie a substitute, they shoulu be
moie likely in countiies wheie the supply of money aujust
less ieauily to exogenous factois. Column 12 shows, how-
evei, that cential bank activism is not significantly ielateu
to the supply of alteinative cuiiencies. Column 1S next
consiueis the (tiaue) openness of a countiy. 0penness is a
geneial pioxy foi economic uevelopment anu integiation of
a countiy. In auuition, in moie open countiies economic
agents shoulu have moie possibilities foi bypassing fiat
money when it uoes not function well (foi example, uue to
high inflation). 0nuei a substituting iole we woulu thus
expect openness to be negatively ielateu to ACs. Column 1S
then shows that openness is not ielateu to ACs. Finally,
column 14 looks at inteinet usage. Inteinet usage is an
alteinative measuie of uevelopment of a countiy. The
availability of inteinet also uiiectly facilitates the spieau of
ACs as many of them aie web-baseu systems. Not suipiis-
ingly we finu that inteinet usage is significantly anu posi-
tively ielateu to ACs.
International Journal Of Community Currency Research 2012 Volume 16 (A) 45-56 Pfajfar Et. Al
51
International Journal Of Community Currency Research 2012 Volume 16 (A) 45-56 Pfajfar Et. Al
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International Journal Of Community Currency Research 2012 Volume 16 (A) 45-56 Pfajfar Et. Al
53
International Journal Of Community Currency Research 2012 Volume 16 (A) 45-56 Pfajfar Et. Al
54
0veiall, oui iesults give a cleai pictuie. Nonetaiy stability,
financial uevelopment anu othei inuices of a countiies ue-
velopment tenu to be conuucive to the emeigence of an
alteinative cuiiency, consistent with Bypothesis 2 (but
inconsistent with Bypothesis 1). As uiscusseu, this suggests
that the iole of AC is mainly complementaiy. In auuition,
we finu eviuence that suppoit the vaiious elements of By-
pothesis S.
H4P4 %'N?.+A,..
In this section we examine the iobustness of oui iesults
iegaiuing uiffeient specifications of the uepenuent vaii-
able. While in the pievious section we stuuieu the ueteimi-
nants of whethei a countiy hosts an AC at all, in this section
we focus on infoimation on the numbei of ACs in a countiy.
Table 2 iepoits iesults foi the same set of contiols as in the
pievious section. Bowevei, the uepenuent vaiiable is now
the numbei of ACs in a countiy. The iegiession iepoits
maiginal coefficients fiom a Poisson iegiession.
The iesults in Table 2 aie almost iuentical to the ones of the
binaiy choice vaiiables. In paiticulai, uBP, population anu
the feueial uummy aie all positively anu significantly ie-
lateu to the numbei of ACs. The inuicatois of monetaiy
instability (inflation, money giowth anu inflation volatility)
aie all significantly anu negatively ielateu to the numbei of
ACs. Fuitheimoie, in the Poisson iegiession money veloc-
ity tuins significant at a 1u% level anu with a negative sign:
this iesult coiioboiates the inveise ielationship between
ACs anu inflation inuicatois anu it is in line with some
theoietical aiguments employeu to justify the choice of
establishing ACs. uBP giowth anu business cycle volatility
aie both negatively ielateu to the numbei of ACs -- as in the
baseline iegiessions. Inuicatois of financial sectoi uevel-
opment (high cieuit volume, high bianching intensity anu a
low numbei of non-peifoiming bank loans) aie all posi-
tively anu significantly ielateu to a countiy's ACs, wheieas
the stock maiket value inuicatoi has again no statistical
effect on the numbeis of ACs. The uomestic cential bank
uummy anu countiy openness have no effect on the pio-
pensity to hosts ACs, similai to the pievious section. Fi-
nally, countiies that have a highei inteinet usage have sig-
nificantly moie ACs.
0sing the numbei of ACs as the uepenuent vaiiable has the
uisauvantage those iesults may be affecteu by a few out-
lieis, that is in oui context countiies with many ACs (Aus-
tialia, Canaua, ueimany anu the 0niteu States each have
ten oi moie ACs). To auuiess this concein, we also caiiy
out iegiessions wheie the uepenuent vaiiable is the oiui-
nal ACs measuie uesciibeu in Section uata. In these iegies-
sions, the foui above mentioneu countiies aie assigneu to
the categoiy 4 oi S, wheie countiies without ACs aie in
categoiy u. Table S iepoits the output of oiueieu Logit
iegiessions. This table iepoits ouus iatios (iathei than
stanuaiu coefficients) which have a moie stiaightfoiwaiu
inteipietation: these iatios iepiesent the ouus that a coun-
tiy falls into a highei (oi lowei) categoiy following a one-
unit change in an explanatoiy vaiiable.
The iesults aie similai to the ones of the pievious two ta-
bles. The sign of the effects anu theii significance foi the
base contiol vaiiables (uBP, population anu feueial
uummy), the monetaiy contiol vaiiables (inflation, money
giowth, inflation volatility, velocity anu inteiest iate) anu
the business cycle inuicatois (giowth anu giowth volatil-
ity) aie iuentical. The financial uevelopment vaiiables have
the same sign as befoie; howevei, the significance of some
vaiiables ueclines. Bianching intensity anu the shaie of
non-peifoiming loans aie now only significant at the 1u%
level anu stock maiket capitalization iemains insignificant.
The iesults foi the iemainuei of the covaiiates, namely the
uomestic cential bank uummy, the inuicatoi of the countiy
openness anu of inteinet usage aie unchangeu.
We thus concluue that oui iesults uo not only apply to
whethei a countiy hosts an AC oi not, but also to the num-
bei of ACs hosteu by a countiy. In auuition, they seem io-
bust to alteinative specifications of the AC intensity in a
countiy (numbei of ACs veisus oiiginal AC ianking).
Anothei issue of iobustness is whethei the iesults also
holu foi the subset of ueveloping countiies. Foi example,
the fact that in the oveiall sample ACs aie a complement to
fiat money may be uiiven by uevelopeu countiies, foi
which issues of inauequate fiat money is not likely to be a
significant issue. We thus have also examineu whethei AC
act peihaps as a substitute in the subset of ueveloping
countiies (foi these countiies inflationaiy issues aie
piobably of a highei level concein). The iegiessions oveiall
suggest that also in the sample of ueveloping countiies ACs
uo not act as a substitute foi fiat money.
P4 &76&;9#576#
In this papei we have stuuieu the ueteiminants of the us-
age of alteinative cuiiencies on a cioss-countiy basis. Foi
this we have peifoimeu cioss-countiy iegiessions ielating
the numbei of alteinative cuiiencies in a countiy to mac-
ioeconomic vaiiables. We have, fiist, founu that measuies
of monetaiy stability (such as inflation, money giowth anu
inflation volatility) aie negatively ielateu to the likelihoou
of ACC auoption. Seconu, we have founu that measuies of
financial sectoi uevelopment (such as uomestic cieuit,
numbei of bank bianches anu non-peifoiming loans) aie
positively ielateu to the numbei of ACCs hosteu by a coun-
tiy. 0ui final key finuing is that oveiall uevelopments of
economic uevelopment (uBP pei heau anu uBP volatility)
aie positively ielateu to ACCs. This suggests, contiaiy to
what one may have expecteu, that alteinative cuiiencies uo
not act as a substitute foi fiat money. They thus seem to
fulfill a iole veiy uiffeient fiom the ones they have fulfilleu
in histoiy wheie they weie mainly establisheu in peiious of
high inflation anu political instability.
Bespite conceins about the viability of the woiluwiue
monetaiy system, oui iesults bioauly suggest that national
cuiiencies aie fulfilling theii iequiieu ioles sufficiently
International Journal Of Community Currency Research 2012 Volume 16 (A) 45-56 Pfajfar Et. Al
55
well. This is because otheiwise one woulu expect alteina-
tive cuiiencies to spiing up in a iesponse to inauequacies
of fiat money, iathei than to complement it. In the absence
of a substitution effect, the ensuing question is then why
alteinative cuiiencies uo act a complement. In this papei
we can only speculate about this anu oui piefeiieu expla-
nation is its iole as a stimulus of the local economy anu in
fuitheiing local inteiests. Fuithei ieseaich is waiianteu on
the usage of alteinative cuiiencies in oiuei to leain moie
about the functioning of fiat money.
"5";57Q%!LEM
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