Counterfeit Quality and Verification in a Monetary Exchange

Ben Fung and Enchuan Shao

Staff Working Papers from Bank of Canada

Abstract: Recent studies on counterfeiting in a monetary search framework show that counterfeiting does not occur in a monetary equilibrium. These findings are inconsistent with the observation that counterfeiting of bank notes has been a serious problem in some countries. In this paper, we show that counterfeiting can exist as an equilibrium outcome in a model in which money is not perfectly recognizable and thus can be counterfeited. A competitive search environment is employed in which sellers post offers and buyers direct their search based on posted offers. When sellers are uninformed about the quality of the money, their offers are pooling and thus buyers can extract rents by using counterfeit money. In this case, counterfeit notes can coexist with genuine notes under certain conditions. We also explicitly model the interaction between sellers' verification decisions and counterfeiters' choices of counterfeit quality. This allows us to better understand how policies can affect counterfeiting.

Keywords: Bank; notes (search for similar items in EconPapers)
JEL-codes: D82 D83 E42 E50 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2011
New Economics Papers: this item is included in nep-cis, nep-cta, nep-dge and nep-mon
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Citations: View citations in EconPapers (3)

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Journal Article: Counterfeit quality and verification in a monetary exchange (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:11-4

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