Gold Coins in a Fiat Currency

Abstract

We investigate the feasibility of minting gold coins with a face value in excess of their bullion value, to circulate as currency alongside paper money. The problem is modelled in a partial equilibrium setting where individuals hold money because they face unpredictable liquidity shocks. Gold coins have a positive expected return. They are less costly to hold than money and are used to meet large, infrequent shocks. An issue of gold coins increases total money demand. Depending on the nature of the liquidity shocks, the seignorage gains to Government from the increase in money holdings may exceed the cost of the gold used in the coins.

JEL Classification: E410, E420, E510