Working Paper
Bank capital standards for market risk: a welfare analysis
Abstract: We develop a model of commodity money and use it to analyze the following two questions motivated by issues in monetary history: What are the conditions under which Gresham's Law holds? And, what are the mechanics of a debasement (lowering the metallic content of coins)? The model contains light and heavy coins, imperfect information, and prices determined via bilateral bargaining. There are equilibria with neither, both, or only one type of coin in circulation. When both circulate, coins may trade by weight or by tale. We discuss the extent to which Gresham's Law holds in the various cases. Following a debasement, the quantity of reminting depends on the incentives oered by the sovereign. Equilibria exist with positive seigniorage and a mixture of old and new coins in circulation.
Keywords: Risk; Bank capital;
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Bibliographic Information
Provider: Federal Reserve Bank of Chicago
Part of Series: Working Paper Series, Issues in Financial Regulation
Publication Date: 1997
Number: WP-97-09