Econometrica: May, 2005, Volume 73, Issue 3
Modeling Denomination Structures
Manjong Lee, Neil Wallace, Tao Zhu
Previous work on the denomination structure of currency treats as exogenous the distribution of transactions and the denominations held by people. Here, by way of a matching model, both are endogenous. In the model, trades in pairwise meetings alternate in time with the opportunity to freely choose a portfolio of denominations and there is a trade‐off between the benefits of small‐denomination money for transacting and the costliness of carrying a large quantity of small‐denomination money. For a given denomination structure, a monetary steady state is shown to exist. The model implies that too small denominations are abandoned.