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A Model of Commodity Money, with Applications to Gresham's Law and the Debasement Puzzle

Author

Listed:
  • François R. Velde

    (Federal Reserve Bank of Chicago)

  • Warren E. Weber

    (Federal Reserve Bank of Minneapolis)

  • Randall Wright

    (University of Pennsylvania)

Abstract

What are the conditions under which Gresham's Law holds? And what are the mechanics of a debasement? To analyze these questions, we develop a model of commodity money with light and heavy coins, imperfect information, and prices determined via bilateral bargaining. There are equilibria with neither, both, or only one type of coin in circulation. When both circulate, coins may trade by weight or by tale. We discuss the extent to which Gresham's Law holds in the various cases. Following a debasement, depending on the incentives offered, equilibria exist with positive seigniorage and a mixture of old and new coins in circulation. (Copyright: Elsevier)

Suggested Citation

  • François R. Velde & Warren E. Weber & Randall Wright, 1999. "A Model of Commodity Money, with Applications to Gresham's Law and the Debasement Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 291-323, January.
    • Handle: RePEc:red:issued:v:2:y:1999:i:1:p:291-323
    DOI: 10.1006/redy.1998.0037
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    More about this item

    Keywords

    random matching; commodity money; Gresham's Law; debasement; asymmetric information;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative

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