Staff Report 215

A Model of Commodity Money, With Applications to Gresham’s Law and the Debasement Puzzle

Warren E. Weber | Retired Economist
François R. Velde
Randall Wright | Consultant

Revised July 1, 1997

We develop a model of commodity money and use it to analyze the following two questions motivated by issues in monetary history: What are the conditions under which Gresham’s Law holds? And, what are the mechanics of a debasement (lowering the metallic content of coins)? The model contains light and heavy coins, imperfect information, and prices determined via bilateral bargaining. There are equilibria with neither, both, or only one type of coin in circulation. When both circulate, coins may trade by weight or by tale. We discuss the extent to which Gresham’s Law holds in the various cases. Following a debasement, the quantity of reminting depends on the incentives offered by the sovereign. Equilibria exist with positive seigniorage and a mixture of old and new coins in circulation.

Published In: Review of Economic Dynamics (Vol. 2, No. 1, January 1999, pp. 291-323)

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