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A Model of Commodity Money, with Applications to Gresham's Law and the Debasement Puzzle

  • François R. Velde

    (Federal Reserve Bank of Chicago)

  • Warren E. Weber

    (Federal Reserve Bank of Minneapolis)

  • Randall Wright

    (Department of Economics, University of Pennsylvania)

What are the conditions under which Gresham's Law holds? And what are the mechanics of a debasement? To analyze these questions, we develop a model of commodity money with light and heavy coins, imperfect information, and prices determined via bilateral bargaining. There are equilibria with neither, both, or only one type of coin in circulation. When both circulate, coins may trade by weight or by tale. We discuss the extent to which Gresham's Law holds in the various cases. Following a debasement, depending on the incentives offered, equilibria exist with positive seigniorage and a mixture of old and new coins in circulation. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1006/redy.1998.0037
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 2 (1999)
Issue (Month): 1 (January)
Pages: 291-323

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Handle: RePEc:red:issued:v:2:y:1999:i:1:p:291-323
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