A Model of (the Threat of) Counterfeiting
Federal Reserve Banks - Federal Reserve Bank of Cleveland
Pennsylvania State University, College of the Liberal Arts - Department of Economic
FRB of Cleveland Working Paper No. 04-01
A simple matching-model of money with the potential for counterfeiting is constructed. In contrast to the existing literature, counterfeiting, if it occurred, would be accompanied by two distortions: costly production of counterfeits and harmful effects on trade. However, application of the Cho-Kreps refinement is shown to imply that there is no equilibrium with counterfeiting. If the cost of producing counterfeits is low enough, then there is no monetary equilibrium. Otherwise, there is a monetary equilibrium without counterfeiting.
Number of Pages in PDF File: 12
Keywords: counterfeiting, matching model, Cho-Kreps refinement
JEL Classification: E40
Date posted: October 30, 2007
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