Macroeconomic Dynamics



Angela Redisha1 and Warren E. Webera2 c1

a1 University of British Columbia

a2 Federal Reserve Bank of Minneapolis and University of Minnesota


Contemporaries and economic historians have noted several features of medieval and early modern European monetary systems that are hard to analyze using models of centralized exchange. For example, contemporaries complained of recurrent shortages of small change and argued that an abundance/dearth of money had real effects on exchange, especially for the poor. To confront these facts, we build a random-matching monetary model with two indivisible coins with different intrinsic values. The model shows that small change shortages can exist, in the sense that adding small coins to an economy with only large coins is welfare-improving. This effect is amplified by increases in trading opportunities. Further, changes in the quantity of monetary metals affect the real economy and the amount of exchange as well as the optimal denomination size. Finally, the model shows that replacing full-bodied small coins with tokens is not necessarily welfare-improving.

(Online publication December 15 2010)


  • Commodity Money;
  • Random Matching;
  • Gresham's Law;
  • Optimal Denominations


c1 Address correspondence to: Warren E. Weber, Research Department, Federal Reserve Bank of Minneapolis, Minneapolis, MN 55480-0291, USA; e-mail:


We thank Valerie Bencivenga, Aleksander Berentsen, Vincent Bignon, Miguel Molico, Alberto Trejos, François Velde, Neil Wallace, Randy Wright, two referees, and participants at seminars at the Bank of Canada, the Canadian Economics Association, the World Cliometrics Conference, the University of Toronto, and the Federal Reserve Bank of St. Louis for helpful comments. The views expressed in this paper are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.