A drift formulation of Gresham's Law

TL;DR

This paper models Gresham's Law using a drift analogy from physics, analyzing how currency flows are influenced by demand elasticity and face value differences across multiple currencies and countries.

Contribution

It introduces a novel drift formulation of Gresham's Law, linking economic currency flows to physical systems and extending the analysis to multiple currencies and countries.

Findings

Currency inflow/outflow rates depend on demand elasticity and face value ratios.

The drift model parallels charged particle systems, providing new insights into currency dynamics.

Multi-currency and multi-country scenarios reveal complex flow patterns.

Abstract

In this paper we analyze Gresham's Law, in particular, how the rate of inflow or outflow of currencies is affected by the demand elasticity of arbitrage and the difference in face value ratios inside and outside of a country under a bimetallic system. We find that these equations are very similar to those used to describe drift in systems of free charged particles. In addition, we look at how Gresham's Law would play out with multiple currencies and multiple countries under a variety of connecting topologies.