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ACCOUNTING FOR DEBASEMENTS: INDIVISIBILITY OR IMPERFECT RECOGNIZABILITY OF MONEY

Ayushi Bajaj

Economic Inquiry, 2020, vol. 58, issue 1, 374-385

Abstract: The widespread prevalence of debasements in medieval Europe constitutes a puzzle under standard price theory because people voluntarily exchanged heavy coins for lighter ones; the difference being kept as seigniorage. I explore two properties of commodity monies that might make holding light coins more desirable, namely indivisibility and imperfect recognizability. If the agent trades indivisible coins, there are inefficiencies arising from over production of goods when the agent uses the heavier coin. Also, when coins are imperfectly recognizable, the heavy coin faces adverse selection. I find that under some parameters, indivisibility by itself leads to positive revenue following debasements, but in a way that eliminates co‐circulation of coins. While with a sufficient degree of imperfect information, debasements can generate positive revenue and also co‐circulation of coins. (JEL D82, D83, E40, E42, N10)

Date: 2020
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