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Return on Commodity Money, Small Change Problems, and Fiat Money
Author(s) -
KIM YOUNG SIK,
LEE MANJONG
Publication year - 2012
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2012.00500.x
Subject(s) - fiat money , inefficiency , economics , economic shortage , medium of exchange , monetary economics , value (mathematics) , circulation (fluid dynamics) , store of value , construct (python library) , time value of money , commodity , commerce , microeconomics , currency , finance , monetary policy , mathematics , computer science , linguistics , philosophy , statistics , physics , programming language , government (linguistics) , thermodynamics
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.