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Coin sizes and payments in commodity money systems

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Author Info
Angela Redish
Warren E. Weber

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Abstract

Commodity money standards in medieval and early modern Europe were characterized by recurring complaints of small change shortages and by numerous debasements of the coinage. To confront these facts, we build a random matching monetary model with two indivisible coins with different intrinsic values. The model shows that small change shortages can exist in the sense that changes in the size of the small coin affect ex ante welfare. Further, the optimal ratio of coin sizes is shown to depend upon the trading opportunities in a country and a country?s wealth. Thus, coinage debasements can be interpreted as optimal responses to changes in fundamentals. Further, the model shows that replacing full-bodied small coins with tokens is not necessarily welfare-improving.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 658.

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Date of creation: 2008
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Handle: RePEc:fip:fedmwp:658

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Keywords: Coinage

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  1. François R. Velde & Warren E. Weber & Randall Wright, 1999. "A Model of Commodity Money, with Applications to Gresham's Law and the Debasement Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 291-323, January. [Downloadable!] (restricted)
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  2. Francois R. Velde & Warren E. Weber, 2000. "A Model of Bimetallism," Journal of Political Economy, University of Chicago Press, vol. 108(6), pages 1210-1234, December. [Downloadable!] (restricted)
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  3. Vincent Bignon & Richard Dutu, 2006. "Moneychangers and Commodity Money," EconomiX Working Papers 2006-9, University of Paris West - Nanterre la Défense, EconomiX. [Downloadable!]
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This page was last updated on 2008-11-26.

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