Working Paper 569

A Model of a Currency Shortage

Neil Wallace
Ruilin Zhou

Published August 1, 1996

Until the mid-19th century, shortages of currency were sometimes serious problems. One common response was to prohibit the export of coins. We use a random matching model with indivisible money to explain a shortage and to judge the desirability of a prohibition on the export of coins. The model, although extreme in many regards, represents better than earlier models a demand for outside money and the problems that arise when that money is indivisible. It can also rationalize a prohibition on the export of coins.

Published In: Journal of Monetary Economics (Vol. 40, No. 3, December 1997, pp. 555-572)

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