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The Threat of Counterfeiting in Competitive Search Equilibrium

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  • Enchuan Shao

Abstract

Recent studies in monetary theory show that if buyers can use lotteries to signal the quality of bank notes, counterfeiting does not occur in a pooling equilibrium. In this paper, I investigate the robustness of this non-existence result by considering an alternative trading mechanism. Specifically, a competitive search environment is employed in which sellers post offers and buyers direct their search based on those offers. In contrast to the previous studies, buyers’ ability to signal is fully eliminated in this environment. However, I find that counterfeiting does not exist if the equilibrium concept proposed by Guerrieri et al. (2010) is used. This is a refinement scheme in which sellers’ out-of-equilibrium beliefs about the likelihood of meeting with different types of buyers are restricted. Moreover, a threat of counterfeiting can result in the collapse of a monetary equilibrium. An extension of the model is provided which allows the threat of counterfeiting to materialize, in that some buyers cannot observe the offers, and therefore search randomly. Counterfeit notes are produced by those buyers who randomly search.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 13-22.

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Length: 39 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:bca:bocawp:13-22

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Keywords: Bank notes;

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References

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  1. Alain Delacroix & Shouyong Shi, 2012. "Pricing and Signaling with Frictions," Working Papers tecipa-455, University of Toronto, Department of Economics.
  2. Yiting Li & Guillaume Rocheteau & Pierre-Olivier Weill, 2011. "Liquidity and the threat of fraudulent assets," Working Paper 1124, Federal Reserve Bank of Cleveland.
  3. Ricardo Cavalcanti & Ed Nosal, 2007. "Counterfeiting as private money in mechanism design," Working Paper 0716, Federal Reserve Bank of Cleveland.
  4. Miquel Faig & Belén Jerez, 2006. "Inflation, Prices, and Information in Competitive Search," Working Papers tecipa-215, University of Toronto, Department of Economics.
  5. Mei Dong & Janet Hua Jiang, 2011. "Money and Price Posting under Private Information," Working Papers, Bank of Canada 11-22, Bank of Canada.
  6. Williamson, S. & Wright, R., 1991. "Barter and Monetary Exchange Under Private Information," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9107, University of Western Ontario, The Centre for the Study of International Economic Relations.
  7. Ping He & Lixin Huang & Randall Wright, 2005. "Money And Banking In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, 05.
  8. Ben Fung & Enchuan Shao, 2011. "Counterfeit Quality and Verification in a Monetary Exchange," Working Papers, Bank of Canada 11-4, Bank of Canada.
  9. Briana Chang, 2011. "Adverse Selection and Liquidity Distortion in Decentralized Markets," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1513, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Benjamin Lester & Andrew Postlewaite & Randall Wright, 2011. "Information and Liquidity," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 43, pages 355-377, October.
  11. Shao Enchuan, 2009. "Money and Barter under Private Information," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 9(1), pages 1-38, February.
  12. Benjamin Lester, 2011. "Information and Prices with Capacity Constraints," American Economic Review, American Economic Association, vol. 101(4), pages 1591-1600, June.
  13. Briana Chang, 2011. "Adverse Selection and Liquidity Distortion in Decentralized Markets," 2011 Meeting Papers 157, Society for Economic Dynamics.
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