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Return on Commodity Money, Small Change Problems, and Fiat Money

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  • YOUNG SIK KIM
  • MANJONG LEE

Abstract

We construct a search‐theoretic model of commodity money where a penny is an indivisible silver coin that can be either melted into a silver bar yielding a positive return or used as a medium of exchange. In equilibria where the rate of return on silver is sufficiently high, small change problems arise in the form of too‐much‐trade inefficiency because of a too‐high value of a penny and no‐trade inefficiency because of a shortage of coins in circulation. In the fiat money system, however, trades are not affected at all by the rate of return on silver and the value of a penny is determined by its medium‐of‐exchange role without incurring the loss in efficiency due to small change problems.

Suggested Citation

  • Young Sik Kim & Manjong Lee, 2012. "Return on Commodity Money, Small Change Problems, and Fiat Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(2‐3), pages 533-549, March.
    • Handle: RePEc:wly:jmoncb:v:44:y:2012:i:2-3:p:533-549
    DOI: 10.1111/j.1538-4616.2012.00500.x
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    Cited by:

    1. Lee, Manjong, 2013. "Coexistence and welfare cost of inflation," Journal of Macroeconomics, Elsevier, vol. 36(C), pages 23-32.

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