Gresham's Law or Gresham's Fallacy?
In this article, the authors argue the answer to their title depends on whether a qualifier is added to the standard version of the law that "bad money drives out good." By examining several historical episodes, they find instances where bad money (valued more at the mint than in the market) failed to drive out good money (valued less at the mint than in the market). Rolnick and Weber next explain why the common qualifier to this law, which requires the mint to fix the rate of exchange at face value, does not reinstate the law. The common qualifier fails to give plausible reasons for how the mint price of money can coexist with a different market price. They then propose a new qualifier to Gresham's Law and argue its validity: bad money drives out good only when there are significant costs to using the good money at a premium.
(This abstract was borrowed from another version of this item.)
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- Thomas J. Sargent & Neil Wallace, 1983.
"A model of commodity money,"
85, Federal Reserve Bank of Minneapolis.
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