Money, real interest rates, and output: a reinterpretation of postwar U.S. data

Robert Litterman and Laurence Marc Weiss ()

No 89, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: The claim that bad money drives out good is one of the oldest and most cited in economics. Economists refer to this claim as Gresham’s law. Yet despite its seemingly universal acceptance, this claim does not warrant its status as a law. We find it has no convincing explanations and many overlooked exceptions. We propose an alternative hypothesis based on the costs of using a medium of exchange at a nonpar price: small-denomination currency undervalued at the mint tends to disappear from circulation while large-denomination currency usually circulates at premium. Examining a variety of historical episodes when market and legal prices were different, we find our “law” can explain history much better than Gresham’s.

New Economics Papers: this item is included in nep-cba and nep-mon
Date: 1984
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Related works:
Working Paper: Money, Real Interest Rates, and Output: A Reinterpretation of Postwar U.S. Data (1983)
Journal Article: Money, Real Interest Rates, and Output: A Reinterpretation of Postwar U.S. Data (1985)
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