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Working Paper

On the Recognizability of Money

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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.
12.01.2005ISSN 2573-7953 WP 05-12DOI 10.26509/frbc-wp-200512
Keywords commodity money, gresham's law, search, informational asymmetries
JEL Classification Codes D80, E40

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

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. https://doi.org/10.26509/frbc-wp-200512