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COIN SIZES AND PAYMENTS IN COMMODITY MONEY SYSTEMS

Published online by Cambridge University Press:  15 December 2010

Angela Redish  and
Warren E. Weber
Angela Redish
Affiliation:
University of British Columbia
Warren E. Weber*
Affiliation:
Federal Reserve Bank of Minneapolis and University of Minnesota
*
Address correspondence to: Warren E. Weber, Research Department, Federal Reserve Bank of Minneapolis, Minneapolis, MN 55480-0291, USA; e-mail: wew@minneapolisfed.org.
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Abstract

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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 amplified 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 MoneyRandom MatchingGresham's LawOptimal Denominations

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 15 , Supplement S1: Money, Credit, and Liquidity: Part 1 , April 2011 , pp. 62 - 82
Copyright
Copyright © Cambridge University Press 2010

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