Counterfeiting and inflation

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Counterfeiting and inflation

Author Info

Cyril Monnet () (DG-Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)

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Cyril Monnet

Abstract

In this paper I show that a lax anti-counterfeiting policy is inconsistent with price stability. I use a deterministic matching model with no commitment and no enforcement. An intrinsically worthless but perfectly durable object called a ‘note’ can be produced by banks at a given cost, but also by nonbanks at a (possibly) higher cost. Counterfeiting occurs when nonbanks produce notes in equilibrium. When it is cheap for nonbanks to produce notes, or the technology used to detect counterfeits is poor, counterfeits are circulating in equilibrium and trade is only implemented with a growing stock of notes (thus creating inflation). Finally, I show that the highest welfare level is achieved when counterfeiting is costly, or when the detection of counterfeits is of high quality.

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Paper provided by European Central Bank in its series Working Paper Series with number 512.

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Length: 22 pages
Date of creation: Aug 2005
Date of revision:
Handle: RePEc:ecb:ecbwps:20050512

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Find related papers by JEL classification:
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-10-04 (All new papers)
NEP-DGE-2005-10-04 (Dynamic General Equilibrium)
NEP-MAC-2005-10-04 (Macroeconomics)
NEP-MON-2005-10-04 (Monetary Economics)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August. [Downloadable!] (restricted)
Other versions:
- Narayana R. Kocherlakota, 1996. "Money is memory," Staff Report 218, Federal Reserve Bank of Minneapolis. [Downloadable!]
Klaus Kultti, 1996. "A monetary economy with counterfeiting," Journal of Economics, Springer, vol. 63(2), pages 175-186, June. [Downloadable!] (restricted)
Ricardo O. Cavalcanti, 2004. "A monetary mechanism for sharing capital: Diamond and Dybvig meet Kiyotaki and Wright," Economic Theory, Springer, vol. 24(4), pages 769-788, November. [Downloadable!] (restricted)

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

William Roberds & Stacey L. Schreft, 2008. "Data breaches and identity theft," Working Paper 2008-22, Federal Reserve Bank of Atlanta. [Downloadable!]

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