Journal of Monetary Economics 45 (2000) 155}184 A search-theoretic model of legal and illegal currency  Elisabeth Soller Curtis*, Christopher J. Waller Department of Economics, Drexel University, Philadelphia, PA 19104, USA Department of Economics, University of Kentucky, Lexington, KY 40506-0034, USA Abstract Using a search-theoretic model of money, we explore the conditions under which two currencies, domestic and foreign, will co-exist despite legal restrictions on the use of foreign currency for internal trade. We study how changes in government policy (i.e., its enforcement of currency laws through "nes or the rate of enforcement) a!ects the acceptability of illegal currency, the equilibrium value of both currencies and the implicit exchange rate. First we construct a model with indivisible goods to show conditions under which legal currency is fully acceptable but illegal currency circulates with varying acceptability. We then introduce bargaining to determine prices in legal and illegal currency. We show that some enforcement polices can create multiple equilibria while others will not. Also, some methods of enforcement are capable of driving the illegal currency out of circulation while others are not.  2000 Elsevier Science B.V. All rights reserved. JEL classixcation: E40; E42 Keywords: Money; Search; Currency restrictions  We are grateful to Gabriel Camera, Miguel Molico, Steve Williamson, Randall Wright and anonymous referee for comments and suggestions. * Corresponding author. Tel.: 215-895-6969; fax: 215-895-6975. E-mail address: sollerev@post.drexel.edu (E. Soller Curtis) 0304-3932/00/$ - see front matter  2000 Elsevier Science B.V. All rights reserved. PII: S 0 3 0 4 - 3 9 3 2 ( 9 9 ) 0 0 0 4 2 - 2