On the Threat of Counterfeiting

Abstract

We study counterfeiting of currency in a search-theoretic model of monetary exchange. In contrast to Nosal and Wallace [Journal of Monetary Economics 54, 229–246 (2007)], we establish that counterfeiting does not pose a threat to the existence of a monetary equilibrium; i.e., a monetary equilibrium exists irrespective of the cost of producing counterfeits, or the ease with which genuine money can be authenticated. However, the possibility of counterfeiting fiat money can affect its value, velocity, output, and welfare, even if no counterfeiting occurs in equilibrium. We provide two extensions of the model under which the threat of counterfeiting can materialize: counterfeits can circulate across periods, and sellers set terms of trade in some matches. Policies that make the currency more costly to counterfeit or easier to recognize raise the value of money and society's welfare, but the latter policy does not always decrease counterfeiting.

Liquidity: A New Monetarist Perspective

“…Interpret  as the probability of a single coincidence times the probability a seller 61 If the asset subject to fraud is fiat money, as in Li and Rocheteau (2009), then (49) becomes () ≤  ( + ), another case where acceptability is not exogenous, but depends on the policy variable . Other applications include Li and Rocheteau (2011), Li et al (2012), Shao (2013), Williamson (2014) and Gomis-Porqueras et al (2014). The last paper includes two currencies and study exchange rates.…”

Pledgability and Liquidity: A New Monetarist Model of Financial and Macroeconomic Activity

“…In that paper, agents who do not recognize quality reject assets outright, which avoids bargaining under asymmetric information, but then liquidity di¤ers only on the extensive margin (acceptance by more or fewer counterparties). One can tackle bargaining under asymmetric information in the model, as in Rocheteau (2011), Li and Rocheteau (2011), and Li et al (2012), and also get liquidity di¤erentials on the intensive margin (acceptance of assets up to endogenous limits), but that is complicated, and often relies on special protocols like take-it-or-leave-it o¤ers. Our approach is based on commitment rather than information frictions -i.e., on pledgability rather than recognizability -which is much easier.…”

New Monetarist Economics: Methods

“…He et al (2008) and Sanches and Williamson (2009) go into more detail analyzing explicit models of theft, and show how this leads to the use of currency substitutes at the optimum. Similarly, Nosal and Wallace (2007) and Li and Rocheteau (2009) provide interesting analyses of counterfeiting. While currency maintenance, theft, counterfeiting, and so on are not usually considered first-order issues in mainstream monetary policy analysis, we think they are potentially important enough to take seriously.…”