On the Recognizability of Money
This paper develops a model of currency circulation under asymmetric information. Agents are heterogeneous and trade in bilateral matches. Coins are intrinsically valuable and are available in two weights, light and heavy. We characterize the equilibrium under complete information and under imperfect information about the quality of coins. We determine a set of conditions under which the two currencies circulate and are traded according to different terms of trade. We study how output, welfare, and the velocity of currency are affected by the recognizability of coins. We show that society's welfare increases as coins become more easily recognizable.
JEL Classification: D80, E40
Keywords: Commodity money, Gresham’s law, Search, Informational asymmetries.
Suggested citation: Dutu, Richard, Ed Nosal and Guillaume Rocheteau, 2005. "On the Recognizability of Money," Federal Reserve Bank of Cleveland, working paper no. 05-12.