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The extrinsic value of low-denomination money holdings

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  • Allan Hernandez-Chanto

    (University of Queensland)

Abstract

We construct a search-theoretic model in which fiat money is available in low and high denominations and where agents can freely reconvert their money holdings using an exogenous technology that arrives stochastically. We show that if both the arrival rate of the exogenous technology and the discount rate are bounded from below and above, there exists an equilibrium in which low denominations have an extrinsic value in any trade. Furthermore, we show that if one-low-coin portfolios are worthless, two-low-coin and one-high-coin portfolios are traded at par.

Suggested Citation

  • Allan Hernandez-Chanto, 2020. "The extrinsic value of low-denomination money holdings," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(2), pages 263-280, October.
    • Handle: RePEc:spr:etbull:v:8:y:2020:i:2:d:10.1007_s40505-020-00182-9
    DOI: 10.1007/s40505-020-00182-9
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    More about this item

    Keywords

    Convertibility; Denominations; Extrinsic value; Money holdings; Premium;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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