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Counterfeiting as Private Money in Mechanism Design

  • RICARDO CAVALCANTI
  • ED NOSAL

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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File URL: http://hdl.handle.net/10.1111/j.1538-4616.2011.00456.x
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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 43 (2011)
Issue (Month): (October)
Pages: 625-636

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Handle: RePEc:mcb:jmoncb:v:43:y:2011:i::p:625-636
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Ricardo de O. Cavalcanti & Andres Erosa & Ted Temzelides, 1999. "Private Money and Reserve Management in a Random-Matching Model," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 929-945, October.
  2. Ed Nosal & Neil Wallace, 2004. "A model of (the threat of) counterfeiting," Working Paper 0401, Federal Reserve Bank of Cleveland.
  3. Ricardo Cavalcanti & Ed Nosal, 2009. "Some benefits of cyclical monetary policy," Economic Theory, Springer, vol. 39(2), pages 195-216, May.
  4. 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.
  5. Edward J. Green & Warren Weber, 1996. "Will the New $100 Bill Decrease Counterfeiting?," Macroeconomics 9609003, EconWPA, revised 11 Sep 1996.
  6. 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.
  7. Stephen D. Williamson, 2002. "Private money and counterfeiting," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 37-57.
  8. Ostroy, Joseph M, 1973. "The Informational Efficiency of Monetary Exchange," American Economic Review, American Economic Association, vol. 63(4), pages 597-610, September.
  9. Klaus Kultti, 1996. "A monetary economy with counterfeiting," Journal of Economics, Springer, vol. 63(2), pages 175-186, June.
  10. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "Inside and outside money as alternative media of exchange," Proceedings, Federal Reserve Bank of Cleveland, pages 443-468.
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