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

Young Sik Kim, Manjong Lee

    Research output: Contribution to journalArticlepeer-review

    5 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

    Fingerprint

    Dive into the research topics of 'Return on Commodity Money, Small Change Problems, and Fiat Money'. Together they form a unique fingerprint.

    Cite this