Signaling in a Model of Currency Circulation under Private Information

How does the imperfect recognizability of commodity money a¤ect its production, terms of trade, and circulation? This paper develops a model where coins of di¤erent intrinsic values are minted to be used as a medium of exchange, and are subject to a private information problem. Our model o¤ers a new perspective over existing analyses by allowing owners of coins to signal the quality of their asset holdings through the o¤er they make. The implications for velocity, output and welfare are examined. Keywords: Commodity money, Gresham’s law, Search, Informational asymmetries. JEL Classi…cation: D80, E40. We thank Neil Wallace and Randall Wright for very useful comments on an earlier draft of this paper. We also thank seminar participants at the Federal Reserve Bank of Cleveland, the 2006 Midwest Economic Theory conference, and the universities of Auckland, Nice, Paris–Nanterre, and Waikato. Richard Dutu would like to acknowledge the support of the Waikato Management School and the Federal Reserve Bank of Cleveland for research funding. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Cleveland or the Federal Reserve System.