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Counterfeiting, screening and government policy

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  • Kang, Kee-Youn
Abstract
We construct a search theoretic model of money in which counterfeit money can be produced at a cost, but agents can screen for fake money, also at a cost. Counterfeiting can occur in equilibrium when both costs and the inflation rate are sufficiently low. Optimal monetary policy is the Friedman rule. However, the rationale for the Friedman rule in an economy with circulation of counterfeit money differs from the conventional mechanism that holds in the model when counterfeiting does not occur. We also study optimal anti-counterfeiting policy that determines the counterfeiting cost and the screening cost.

Suggested Citation

  • Kang, Kee-Youn, 2017. "Counterfeiting, screening and government policy," Journal of Economic Theory, Elsevier, vol. 172(C), pages 26-54.
    • Handle: RePEc:eee:jetheo:v:172:y:2017:i:c:p:26-54
    DOI: 10.1016/j.jet.2017.08.002
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    References listed on IDEAS

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    Cited by:

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    2. Charles M. Kahn & Francisco Rivadeneyra & Tsz-Nga Wong, 2018. "Should the Central Bank Issue E-money?," Staff Working Papers 18-58, Bank of Canada.
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    4. Rocheteau, Guillaume & Wang, Lu, 2023. "Endogenous liquidity and volatility," Journal of Economic Theory, Elsevier, vol. 210(C).

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    More about this item

    Keywords

    Money; Counterfeiting; Screening; Verification; Search;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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