Edward J. Green - Senior Policy Advisor, Federal Reserve Bank of Chicago
Warren E. Weber - Retired Economist
Published September 1, 1996
A current U.S. policy is to introduce a new style of currency that is harder to counterfeit, but not immediately to withdraw from circulation all of the old-style currency. This policy is analyzed in a random-matching model of money, and its potential to decrease counterfeiting in the long run is shown. For various parameters of the model, three types of equilibria are found to occur. In only one does counterfeiting continue at its initial high level. In the other two, both genuine and counterfeit old-style money go out of circulation—immediately in one and gradually in the other. There are objectives and expectations that can reasonably be imputed to policymakers, under which the policy that they have chosen can make sense.
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