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

Young Sik Kim, Manjong Lee

Research output: Contribution to journalArticle

3 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)533-549
Number of pages17
JournalJournal of Money, Credit and Banking
Volume44
Issue number2-4
DOIs
Publication statusPublished - 2012 Mar

Keywords

  • Commodity money
  • Divisibility
  • Fiat money
  • Small change problem

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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