Carrying cost of money and real effects of denomination structure

Abstract

This paper provides an explanation for the nature of the real effects of denomination structure using parameterized versions of a search-based model. We show that the carrying cost of money incurs the distortionary effect on output and the adverse distributional effect on welfare. With monetary expansion, average propensity to consume increases more rapidly in a single denomination than in multiple denominations due to the distortionary effect, and the welfare gap between them is augmented due to both distortionary and adverse distributional effects. The implication of these effects for modern economies is that a binary-decimal Structure adopted by the EU and the US is superior to a decimal-pair structure adopted by Japan and South Korea. (C) 2009 Elsevier Inc. All rights reserved.