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

Young Sik Kim and Manjong Lee

Journal of Money, Credit and Banking, 2012, vol. 44, issue 2‐3, 533-549

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.

Date: 2012
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https://doi.org/10.1111/j.1538-4616.2012.00500.x

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Journal Article: Return on Commodity Money, Small Change Problems, and Fiat Money (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:44:y:2012:i:2-3:p:533-549

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