A Model of (the Threat of) Counterfeiting
A simple matching-model of money with the potential for counterfeiting is constructed. In contrast to the existing literature, counterfeiting, if it occurred, would be accompanied by two distortions: costly production of counterfeits and harmful effects on trade. However, application of the Cho-Kreps refinement is shown to imply that there is no equilibrium with counterfeiting. If the cost of producing counterfeits is low enough, then there is no monetary equilibrium. Otherwise, there is a monetary equilibrium without counterfeiting.
JEL Classification: E40
Key Words: counterfeiting, matching model, Cho-Kreps refinement
Suggested citation: Nosal, Ed, and Neil Wallace, 2004. "A Model of (the Threat of) Counterfeiting," Federal Reserve Bank of Cleveland, Working Paper no. 04-01.