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Counterfeit Quality and Verification in a Monetary Exchange

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  • Ben Fung
  • Enchuan Shao

Abstract

Recent studies on counterfeiting in a monetary search framework show that counterfeiting does not occur in a monetary equilibrium. These findings are inconsistent with the observation that counterfeiting of bank notes has been a serious problem in some countries. In this paper, we show that counterfeiting can exist as an equilibrium outcome in a model in which money is not perfectly recognizable and thus can be counterfeited. A competitive search environment is employed in which sellers post offers and buyers direct their search based on posted offers. When sellers are uninformed about the quality of the money, their offers are pooling and thus buyers can extract rents by using counterfeit money. In this case, counterfeit notes can coexist with genuine notes under certain conditions. We also explicitly model the interaction between sellers' verification decisions and counterfeiters' choices of counterfeit quality. This allows us to better understand how policies can affect counterfeiting.

Suggested Citation

  • Ben Fung & Enchuan Shao, 2011. "Counterfeit Quality and Verification in a Monetary Exchange," Staff Working Papers 11-4, Bank of Canada.
    • Handle: RePEc:bca:bocawp:11-4
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    References listed on IDEAS

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    1. Edward J. Green & Warren E. Weber, 1996. "Will the new $100 bill decrease counterfeiting?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 20(Sum), pages 3-10.
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    11. Ben Fung & Enchuan Shao, 2011. "Modelling the Counterfeiting of Bank Notes: A Literature Review," Bank of Canada Review, Bank of Canada, vol. 2011(Autumn), pages 29-35.
    12. Moen, Espen R, 1997. "Competitive Search Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 385-411, April.
    13. Guillaume Rocheteau & Randall Wright, 2005. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," Econometrica, Econometric Society, vol. 73(1), pages 175-202, January.
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    Cited by:

    1. Shao, Enchuan, 2014. "The threat of counterfeiting in competitive search equilibrium," Journal of Economic Dynamics and Control, Elsevier, vol. 47(C), pages 168-185.
    2. Kang, Kee-Youn, 2017. "Counterfeiting, screening and government policy," Journal of Economic Theory, Elsevier, vol. 172(C), pages 26-54.
    3. Nathan Viles & Alexandra Rush & Thomas Rohling, 2015. "The Social Costs of Currency Counterfeiting," RBA Research Discussion Papers rdp2015-05, Reserve Bank of Australia.
    4. Rubén Ortuño & José M. Sánchez & Diego Álvarez & Miguel López & Fernando León, 2020. "Neurometrics applied to banknote and security features design," Occasional Papers 2008, Banco de España.

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    More about this item

    Keywords

    Bank notes;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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