The extrinsic value of low-denomination money holdings

Allan Hernandez-Chanto ()
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Allan Hernandez-Chanto: University of Queensland
Authors registered in the RePEc Author Service: Allan Hernández

Economic Theory Bulletin, 2020, vol. 8, issue 2, No 7, 263-280

Abstract: Abstract We construct a search-theoretic model in which fiat money is available in low and high denominations and where agents can freely reconvert their money holdings using an exogenous technology that arrives stochastically. We show that if both the arrival rate of the exogenous technology and the discount rate are bounded from below and above, there exists an equilibrium in which low denominations have an extrinsic value in any trade. Furthermore, we show that if one-low-coin portfolios are worthless, two-low-coin and one-high-coin portfolios are traded at par.

Keywords: Convertibility; Denominations; Extrinsic value; Money holdings; Premium (search for similar items in EconPapers)
JEL-codes: E50 E52 (search for similar items in EconPapers)
Date: 2020
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Working Paper: The Extrinsic Value of Low-Denomination Money Holdings (2016)
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DOI: 10.1007/s40505-020-00182-9

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