A MONETARY ECONOMY WITH COUNTERFEITING

We apply a search-theoretic model of fiat money to study the equilibri a in which counterfeit money is accepted. Circulation of counterfeit m oney presupposes that the agents are impatient and that the punishment for holding it is not too severe. When the stock of genuine money is small counterfeit money may improve the efficiency of the economy. We establish that a monetary economy can be created with private provisio n of (counterfeit) money as long as the ruler has control over punishm ents. Totally noncooperative provision will fail as the economy will b ecome flooded with money.