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.
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I am very grateful to Neil Wallace for his guidance and support. I am also indebted to Guillaume Rocheteau for useful comments to improve the paper. I appreciate comments from participants in the Summer Workshop on Money, Banking, Payments and Finance, Federal Reserve Bank of Chicago, summer 2009.
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Hu, TW. Imperfect recognizability and coexistence of money and higher-return assets. Econ Theory 53, 111–138 (2013). https://doi.org/10.1007/s00199-011-0687-6
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DOI: https://doi.org/10.1007/s00199-011-0687-6