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Macroeconomic Dynamics, 15 (Supplement 1), 2011, 6282. Printed in the United States of America. doi:10.1017/S1365100510000593
ANGELA REDISH
University of British Columbia
WARREN E. WEBER
Federal Reserve Bank of Minneapolis andUniversity of Minnesota
Contemporaries and economic historians have noted several features of medieval and early modern European monetary systems that are hard to analyze using models of centralized exchange. For example, contemporaries complained of recurrent shortages of small change and argued that an abundance/dearth of money had real effects on exchange, especially for the poor. 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 adding small coins to an economy with only large coins is welfare-improving. This effect is amplied by increases in trading opportunities. Further, changes in the quantity of monetary metals affect the real economy and the amount of exchange as well as the optimal denomination size. Finally, the model shows that replacing full-bodied small coins with tokens is not necessarily welfare-improving.
Keywords: Commodity Money, Random Matching, Greshams Law, Optimal
Denominations
1. INTRODUCTION
Modern monetary economies rely on at money, largely a twentieth-century innovation. Prior to that time, commodity monies, in a variety of guises, were used to facilitate exchange. This paper takes the view that there is an important distinction between at money and commodity money that has not been given sufcient attention. Specically, with commodity money there is a necessary link between the physical characteristics (e.g., weight and size) of a unit of money
We thank Valerie Bencivenga, Aleksander Berentsen, Vincent Bignon, Miguel Molico, Alberto Trejos, Franois Velde, Neil Wallace, Randy Wright, two referees, and participants at seminars at the Bank of Canada, the Canadian Economics Association, the World Cliometrics Conference, the University of Toronto, and the Federal Reserve Bank of St. Louis for helpful comments. The views expressed in this paper are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. Address correspondence to: Warren E. Weber, Research Department, Federal Reserve Bank of Minneapolis, Minneapolis, MN 55480-0291, USA; e-mail: [email protected].
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2010 Cambridge University Press 1365-1005/10 62
COIN SIZES AND PAYMENTS IN COMMODITY MONEY SYSTEMS
COIN SIZES...