On the Recognizability of Money
43 Pages Posted: 31 Oct 2007
Date Written: December 2005
This paper develops a model of currency circulation under asymmetric information. Agents are heterogeneous and trade in bilateral matches. Coins are intrinsically valuable and are available in two weights, light and heavy. We characterize the equilibrium under complete information and under imperfect information about the quality of coins. We determine a set of conditions under which the two currencies circulate and are traded according to different terms of trade. We study how output, welfare, and the velocity of currency are affected by the recognizability of coins. We show that society's welfare increases as coins become more easily recognizable.
Keywords: commodity money, Gresham's law, search, informational asymmetries
JEL Classification: D80, E40
Suggested Citation: Suggested Citation