Imperfect recognizability and coexistence of money and higher-return assets

Tai Wei Hu*

*Corresponding author for this work

Research output: Contribution to journalArticle (Academic Journal)peer-review

7 Citations (Scopus)

Abstract

Existing solutions to the problem of coexistence of money and higher-return substitutes that rely on imperfect recognizability of the substitutes adopt extreme assumptions: they either have a zero cost of counterfeiting the substitutes or omit plausible refinements that would rule out pooling equilibria. Here coexistence is obtained with a general distribution of positive counterfeiting costs within a signaling-game framework in which the intuitive criterion is invoked. Moreover, if the cost of counterfeiting is small, then any monetary equilibrium that satisfies the intuitive criterion necessarily exhibits coexistence. A continuity assumption on off-equilibrium beliefs is also considered. It is satisfied by equilibria with small use of substitutes, but not by cash-in-advance equilibria.

Original languageEnglish
Pages (from-to)111-138
Number of pages28
JournalEconomic Theory
Volume53
Issue number1
DOIs
Publication statusPublished - May 2013

Keywords

  • Cash-in-advance
  • Counterfeiting
  • Monetary system
  • Signaling games

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