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Return on Commodity Money, Small Change Problems, and Fiat Money

Authors
Kim, Young SikLee, Manjong
Issue Date
Mar-2012
Publisher
WILEY-BLACKWELL
Keywords
E40; E42; commodity money; fiat money; divisibility; small change problem
Citation
JOURNAL OF MONEY CREDIT AND BANKING, v.44, no.2-3, pp.533 - 549
Indexed
SSCI
SCOPUS
Journal Title
JOURNAL OF MONEY CREDIT AND BANKING
Volume
44
Number
2-3
Start Page
533
End Page
549
URI
https://scholar.korea.ac.kr/handle/2021.sw.korea/105424
DOI
10.1111/j.1538-4616.2012.00500.x
ISSN
0022-2879
Abstract
We construct a search-theoretic model of commodity money where a penny is an indivisible silver coin that can be either melted into a silver bar yielding a positive return or used as a medium of exchange. In equilibria where the rate of return on silver is sufficiently high, small change problems arise in the form of too-much-trade inefficiency because of a too-high value of a penny and no-trade inefficiency because of a shortage of coins in circulation. In the fiat money system, however, trades are not affected at all by the rate of return on silver and the value of a penny is determined by its medium-of-exchange role without incurring the loss in efficiency due to small change problems.
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