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Counterfeiting as Private Money in Mechanism Design

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  • Ed Nosal

    (Federal Reserve Bank of Cleveland)

  • Ricardo Cavalcanti

    (Getulio Vargas Foundation)

Abstract

We find that in order to have circulating counterfeit notes as part of the optimal mechanism, there must be heterogeneity of opportunities to create and circulate counterfeit among agents. When such heterogeneity exists, we find that counterfeiting creates distortions at both the intensive and extensive margins. That is, output will tend to "low" and the supply of money will tend to be "high," compared to an environment where counterfeiting is not possible. When there is no heterogeneity in opportunities to create and circulate counterfeit notes, then, like in Nosal and Wallace (2005), although the threat of counterfeiting has negative implications for welfare, the optimal mechanism will not allow counterfeit notes to circulate.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 371.

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Date of creation: 2007
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Handle: RePEc:red:sed007:371

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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References

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  1. Klaus Kultti, 1996. "A monetary economy with counterfeiting," Journal of Economics, Springer, vol. 63(2), pages 175-186, June.
  2. Cavalcanti, Ricardo de O & Wallace, Neil, 1999. "Inside and Outside Money as Alternative Media of Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 443-57, August.
  3. Ricardo Cavalcanti & Andres Erosa & Ted Temzelides, 1998. "Private Money and Reserve Management in a Random Matching Model," Macroeconomics 9803008, EconWPA.
  4. Stephen D. Williamson, 2002. "Private money and counterfeiting," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 37-57.
  5. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
  6. Ed Nosal & Ricardo Cavalcanti, 2004. "Some benefits of cyclical monetary policy," 2004 Meeting Papers 159, Society for Economic Dynamics.
  7. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 118-41, February.
  8. Edward J. Green & Warren E. Weber, 1996. "Will the new $100 bill decrease counterfeiting?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-10.
  9. Ostroy, Joseph M, 1973. "The Informational Efficiency of Monetary Exchange," American Economic Review, American Economic Association, vol. 63(4), pages 597-610, September.
  10. Nosal, Ed & Wallace, Neil, 2007. "A model of (the threat of) counterfeiting," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 994-1001, May.
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Cited by:
  1. Guillaume Rocheteau & Pierre‐Olivier Weill, 2011. "Liquidity in Frictional Asset Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 261-282, October.
  2. Roberds, William & Schreft, Stacey L., 2009. "Data breaches and identity theft," Journal of Monetary Economics, Elsevier, vol. 56(7), pages 918-929, October.
  3. Enchuan Shao, 2013. "The Threat of Counterfeiting in Competitive Search Equilibrium," Working Papers 13-22, Bank of Canada.
  4. Ricardo de O. Calacanti, 2010. "Inside-money theory after Diamond and Dybvig," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 59-82.
  5. Benjamin Lester & Andrew Postlewaite & Randall Wright, 2008. "Information, Liquidity and Asset Prices," PIER Working Paper Archive 08-039, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

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