Dirty money

An inter-governmental body is encouraging the replacement of currency with the objective of discouraging illegal economic activities. This policy is a nalyzed in a search-theoretic model where individuals choose legal or illeg al production, settle trades via monetary or costly intermediated exchange, and where the government imperfectly monitors monetary transactions. Stati onary monetary equilibria with both legal and illegal productions exist, in which case the over-provision of currency may increment the extent of ille gal production. This result holds also in the presence of intermediated exc hange of legal goods. Equilibria with differing transaction patterns and de grees of illicit activities coexist. (C) 2001 Elsevier Science B.V. All rig hts reserved.