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A model of a currency shortage

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  • Neil Wallace
  • Ruilin Zhou

Abstract

Until the mid-19th century, shortages of currency were sometimes serious problems. One common response was to prohibit the export of coins. We use a random matching model with indivisible money to explain a shortage and to judge the desirability of a prohibition on the export of coins. The model, although extreme in many regards, represents better than earlier models a demand for outside money and the problems that arise when that money is indivisible. It can also rationalize a prohibition on the export of coins.

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  • Neil Wallace & Ruilin Zhou, 1996. "A model of a currency shortage," Working Papers 569, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmwp:569
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    References listed on IDEAS

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    1. Cooley Thomas F. & Smith Bruce D., 1995. "Indivisible Assets, Equilibrium, and the Value of Intermediation," Journal of Financial Intermediation, Elsevier, vol. 4(1), pages 48-76, January.
    2. Shi Shougong, 1995. "Money and Prices: A Model of Search and Bargaining," Journal of Economic Theory, Elsevier, vol. 67(2), pages 467-496, December.
    3. Rao Aiyagari, S. & Wallace, Neil & Wright, Randall, 1996. "Coexistence of money and interest-bearing securities," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 397-419, June.
    4. Ruilin Zhou, 1997. "Currency Exchange in a Random Search Model," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(2), pages 289-310.
    5. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 118-141, February.
    6. Kiminori Matsuyama & Nobuhiro Kiyotaki & Akihiko Matsui, 1993. "Toward a Theory of International Currency," Review of Economic Studies, Oxford University Press, vol. 60(2), pages 283-307.
    7. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
    8. Hanson, John R, II, 1979. "Money in the Colonial American Economy: An Extension," Economic Inquiry, Western Economic Association International, vol. 17(2), pages 281-286, April.
    9. Glassman, Debra & Redish, Angela, 1988. "Currency depreciation in early modern England and France," Explorations in Economic History, Elsevier, vol. 25(1), pages 75-97, January.
    10. Marimon, Ramon & Wallace, Neil, 1987. "Trade using assets divisible at a cost," Journal of Economic Theory, Elsevier, vol. 43(2), pages 223-251, December.
    11. Hart, Oliver D., 1975. "On the optimality of equilibrium when the market structure is incomplete," Journal of Economic Theory, Elsevier, vol. 11(3), pages 418-443, December.
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    Citations

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    Cited by:

    1. Wallace, Neil, 2003. "Modeling Small Change: A Review Article," Working Papers 9-03-3, Pennsylvania State University, Department of Economics.
    2. Cristian Frasser & Lucie Lebeau, 2023. "Complementary Currencies and Liquidity: The Case of Coca-Base Money," Working Papers 2307, Federal Reserve Bank of Dallas.
    3. Jin, Gu & Zhu, Tao, 2019. "Debasements and Small Coins: An Untold Story of Commodity Money," MPRA Paper 93057, University Library of Munich, Germany.
    4. Ricardo de O. Cavalcanti & Neil Wallace, 1999. "A model of private bank-note issue," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 104-136, January.
    5. Colacelli, Mariana & Blackburn, David J.H., 2009. "Secondary currency: An empirical analysis," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 295-308, April.
    6. Williamson, Stephen & Wright, Randall, 2010. "New Monetarist Economics: Models," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 2, pages 25-96, Elsevier.
    7. Manjong Lee & Neil Wallace, 2006. "Optimal divisibility when money is costly to produce," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(3), pages 541-556, July.
    8. Wallace, Neil & Zhu, Tao, 2007. "Float on a note," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 229-246, March.
    9. Bignon, Vincent & Dutu, Richard, 2017. "Coin Assaying And Commodity Money," Macroeconomic Dynamics, Cambridge University Press, vol. 21(6), pages 1305-1335, September.
    10. Xavier Cuadras‐Morató, 2009. "Circulation Of Private Notes During A Currency Shortage," Manchester School, University of Manchester, vol. 77(4), pages 461-478, July.
    11. Farley Grubb, 2012. "Chronic Specie Scarcity and Efficient Barter: The Problem of Maintaining an Outside Money Supply in British Colonial America ," Working Papers 12-08, University of Delaware, Department of Economics.
    12. Wallace, Neil, 2003. "Modeling small change: a review article," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1391-1401, September.
    13. Huberto M. Ennis, 2003. "Shortages of small change in early Argentina," Working Paper 03-12, Federal Reserve Bank of Richmond.
    14. Young Sik Kim & Manjong Lee, 2012. "Return on Commodity Money, Small Change Problems, and Fiat Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(2‐3), pages 533-549, March.
    15. Li, Yiting, 2002. "Government transaction policy and Gresham's law," Journal of Monetary Economics, Elsevier, vol. 49(2), pages 435-453, March.
    16. Warren E. Weber & Angela Redish, 2008. "A Model of Small Change Shortages," 2008 Meeting Papers 677, Society for Economic Dynamics.
    17. Farley Grubb, 2015. "Common Currency versus Currency Union: The U.S. Continental Dollar and Denominational Structure, 1775-1776," NBER Working Papers 21728, National Bureau of Economic Research, Inc.
    18. Svetlana Boyarchenko & Sergei Levendorskii, 2004. "Inside and Outside Money, with an Application to the Russian Virtual Economy," Macroeconomics 0405009, University Library of Munich, Germany.
    19. Agapov Stanislav & Boyarchenko Svetlana & Levendorsky Sergey, 2003. "A Three-Sector Model of the Russian Virtual Economy," EERC Working Paper Series 02-06e, EERC Research Network, Russia and CIS.
    20. Wallace, Neil, 2000. "A model of the liquidity structure based on asset indivisibility," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 55-68, February.
    21. Tao Zhu & Neil Wallace, 2004. "Float on a Note," 2004 Meeting Papers 342, Society for Economic Dynamics.
    22. Farley Grubb, 2015. "Common Currency versus Currency Union: The U.S. Continental Dollar and Denominational Structure, 1775-1779," Working Papers 15-10, University of Delaware, Department of Economics.

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    Keywords

    Money supply;

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