On the threat of counterfeiting
AbstractWe study counterfeiting of currency in a search–theoretic model of monetary exchange. In contrast to Nosal and Wallace (2007), we establish that counterfeiting does not pose a threat to the existence of a monetary equilibrium; i.e., a monetary equilibrium exists irrespective of the cost of producing counterfeits, or the ease with which genuine money can be authenticated. However, the possibility to counterfeit ?at money can affect its value, velocity, output and welfare, even if no counterfeiting occurs in equilibrium. We provide two extensions of the model under which the threat of counterfeiting can materialize: counterfeits can circulate across periods, and sellers set terms of trades in some matches. Policies that make the currency more costly to counterfeit or easier to recognize raise the value of money and society’s welfare, but the latter policy does not always decrease counterfeiting.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0809.
Date of creation: 2008
Date of revision:
Other versions of this item:
- NEP-ALL-2008-12-07 (All new papers)
- NEP-DGE-2008-12-07 (Dynamic General Equilibrium)
- NEP-MAC-2008-12-07 (Macroeconomics)
- NEP-MON-2008-12-07 (Monetary Economics)
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