Peck and Shell (2003) show that it is possible to get a bank run in a Diamond-Dybvig environment. The mechanism they use, however, is not an optimal one. When an optimal mechanism is used, the bank run equilibrium disappears.

We find that in order to have circulating counterfeit notes as part of the optimal mechanism, there must be heterogeneity of opportunities to create and circulate counterfeit among agents. When such heterogeneity exists, we find that counterfeiting creates distortions at both the intensive and...

We describe counterfeiting activity as the issuance of private money, one which is difficult to monitor. Our approach, which amends the basic random-matching model of money in mechanism design, allows a tractable welfare analysis of currency competition. We show that it is not efficient to...

Should monetary policy be cyclical? The debate around this question is old but has benefited very little from research on the pure theory of money. In our model, people trade in pairs, without double coincidence of wants and face seasonal fluctuations. Monetary policy is restricted to taxing...