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Counterfeiting as Private Money in Mechanism Design

  • Ed Nosal

    (Federal Reserve Bank of Cleveland)

  • Ricardo Cavalcanti

    (Getulio Vargas Foundation)

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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Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 371.

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Date of creation: 2007
Date of revision:
Handle: RePEc:red:sed007:371
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. Stephen D. Williamson, 2002. "Private money and counterfeiting," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 37-57.
  2. Edward J. Green & Warren E. Weber, 1996. "Will the new $100 bill decrease counterfeiting?," Working Papers 571, Federal Reserve Bank of Minneapolis.
  3. Ricardo Cavalcanti & Ed Nosal, 2009. "Some benefits of cyclical monetary policy," Economic Theory, Springer, vol. 39(2), pages 195-216, May.
  4. Cavalcanti, R. & Erosa, A. & Temzelides, T., 1997. "Private Money and Reserve Management in a Random Matching Model," UWO Department of Economics Working Papers 9715, University of Western Ontario, Department of Economics.
  5. Ed Nosal & Neil Wallace, 2004. "A model of (the threat of) counterfeiting," Working Paper 0401, Federal Reserve Bank of Cleveland.
  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. Klaus Kultti, 1996. "A monetary economy with counterfeiting," Journal of Economics, Springer, vol. 63(2), pages 175-186, June.
  8. 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.
  9. Joseph M. Ostroy, 1972. "The Informational Efficiency of Monetary Exchange," UCLA Economics Working Papers 021, UCLA Department of Economics.
  10. 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.
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