Modeling Denomination Structures
Manjong Lee, Neil Wallace, Tao Zhu
Econometrica · 2005 · Volume 73 · Issue 3
DOI: 10.1111/j.1468-0262.2005.00599.x
Abstract
Previous work on the denomination structure of currency treats as exogenous the distribution of transactions and the denominations held by people. Here, by way of a matching model, both are endogenous. In the model, trades in pairwise meetings alternate in time with the opportunity to freely choose a portfolio of denominations and there is a trade-off between the benefits of small-denomination money for transacting and the costliness of carrying a large quantity of small-denomination money. For a given denomination structure, a monetary steady state is shown to exist. The model implies that too small denominations are abandoned.
Keywords
Currency, denominations, matching model
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