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On The Threat Of Counterfeiting

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  • Li, Yiting
  • Rocheteau, Guillaume

Abstract

We study counterfeiting of currency in a search-theoretic model of monetary exchange. In contrast to Nosal and Wallace [Journal of Monetary Economics 54, 229–246 (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 of counterfeiting fiat 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 trade 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.

Suggested Citation

  • Li, Yiting & Rocheteau, Guillaume, 2011. "On The Threat Of Counterfeiting," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S1), pages 10-41, April.
    • Handle: RePEc:cup:macdyn:v:15:y:2011:i:s1:p:10-41_00
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    Cited by:

    1. Tao Peng, 2017. "Money And Product Quality Under Asymmetric Information," Economic Inquiry, Western Economic Association International, vol. 55(3), pages 1388-1399, July.
    2. Shao, Enchuan, 2014. "The threat of counterfeiting in competitive search equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 47(C), pages 168-185.
    3. Herrenbrueck, Lucas, 2014. "Quantitative Easing and the Liquidity Channel of Monetary Policy," MPRA Paper 70686, University Library of Munich, Germany, revised 10 Apr 2016.
    4. Berentsen, Aleksander & McBride, Michael & Rocheteau, Guillaume, 2017. "Limelight on dark markets: Theory and experimental evidence on liquidity and information," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 70-90.
    5. Bajaj, Ayushi, 2018. "Undefeated equilibria of the Shi–Trejos–Wright model under adverse selection," Journal of Economic Theory, Elsevier, vol. 176(C), pages 957-986.
    6. Stephen D. Williamson & Randall Wright, 2010. "New monetarist economics: methods," Review, Federal Reserve Bank of St. Louis, vol. 92(May), pages 265-302.
    7. Rocheteau, Guillaume & Wright, Randall & Xiaolin Xiao, Sylvia, 2018. "Open market operations," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 114-128.
    8. Kang, Kee-Youn, 2017. "Counterfeiting, screening and government policy," Journal of Economic Theory, Elsevier, vol. 172(C), pages 26-54.
    9. Zhang, Cathy, 2014. "An information-based theory of international currency," Journal of International Economics, Elsevier, vol. 93(2), pages 286-301.
    10. Venky Venkateswaran & Randall Wright, 2014. "Pledgability and Liquidity: A New Monetarist Model of Financial and Macroeconomic Activity," NBER Macroeconomics Annual, University of Chicago Press, vol. 28(1), pages 227-270.
    11. Ricardo Cavalcanti & Ed Nosal, 2011. "Counterfeiting as Private Money in Mechanism Design," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 625-636, October.
    12. Daisuke Ikeda, 2022. "Digital Money as a Medium of Exchange and Monetary Policy in Open Economies," IMES Discussion Paper Series 22-E-10, Institute for Monetary and Economic Studies, Bank of Japan.
    13. Charles M Kahn & Francisco Rivadeneyra & Tsz-Nga Wong, . "Should the central bank issue e-money?," Journal of Financial Market Infrastructures, Journal of Financial Market Infrastructures.
    14. Wang, Chien-Chiang & Li, Yiting, 2023. "Anonymous credit," MPRA Paper 118480, University Library of Munich, Germany.
    15. Herrenbrueck, Lucas, 2019. "Frictional asset markets and the liquidity channel of monetary policy," Journal of Economic Theory, Elsevier, vol. 181(C), pages 82-120.
    16. Rocheteau, Guillaume & Wang, Lu, 2023. "Endogenous liquidity and volatility," Journal of Economic Theory, Elsevier, vol. 210(C).
    17. Shao, Enchuan & Fung, Ben S.C., 2016. "Counterfeit quality and verification in a monetary exchange," Economic Modelling, Elsevier, vol. 52(PA), pages 13-25.
    18. Guillaume Rocheteau, 2011. "Discussion of “Information and Liquidity”," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s2), pages 379-384, October.
    19. Choi, Michael, 2018. "Imperfect information transmission and adverse selection in asset markets," Journal of Economic Theory, Elsevier, vol. 176(C), pages 619-649.
    20. Guillaume Rocheteau, 2009. "Information and liquidity: a discussion," Working Papers (Old Series) 0902, Federal Reserve Bank of Cleveland.

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