Nominal Exchange Rate Determinacy under the Threat of Currency Counterfeiting

Counterfeiting substitute media - of - exchange : a threat to monetary systems

One justification for cash-in-advance equilibria is the assumption that the counterfeiting of money is impossible, while the counterfeiting of higher-return substitute media-ofexchange is costless. It is shown that this justification is not robust to replacing costless by costly and placing the analysis within a signaling-game framework in which the intuitive criterion is invoked. In particular...

On the Threat of Counterfeiting

We study counterfeiting of currency in a search-theoretic model of monetary exchange. In contrast to Nosal and Wallace (2007), we establish that counterfeiting does not pose a threat to the existence of a monetary equilibrium; i.e., a monetary equilibrium exists irrespective of the cost of producing counterfeits, or the ease with which genuine money can be authenticated. However, the possibilit...

A Model of ( the Threat of ) Counterfeiting

A simple matching-model of money with the potential for counterfeiting is constructed. In contrast to the existing literature, counterfeiting, if it occurred, would be accompanied by two distortions: costly production of counterfeits and harmful effects on trade. However, application of the Cho-Kreps refinement is shown to imply that there is no equilibrium with counterfeiting. If the cost of p...

The Interest Rate–Exchange Rate Nexus in Currency Crises

Sharp exchange rate depreciations in the East Asian crisis countries (Indonesia, Korea, and Thailand) raised doubts about the efficacy of increasing interest rates to defend the currency. Using a standard monetary model of exchange rate determination, this paper shows that tighter monetary policy was in fact associated with an appreciation of the exchange rate in these countries and during the ...

Stylized Facts of Nominal Exchange Rate Returns