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Gresham's Law or Gresham's Fallacy?

Arthur J. Rolnick and Warren E. Weber
Journal of Political Economy
Vol. 94, No. 1 (Feb., 1986), pp. 185-199
Stable URL: http://www.jstor.org/stable/1831965
Page Count: 15
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Gresham's Law or Gresham's Fallacy?
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Abstract

Gresham's law often takes two forms: the rule that bad money drives out good money and a qualified version of that rule that requires a fixed exchange rate between the two monies. Yet history contradicts both of these forms. In fact, the exchange rate has never been fixed, and we doubt it ever could be. We propose a new version of the law that is more feasible and more consistent with the evidence. It requires a fixed transaction cost of using currencies at nonparprices for the rule to apply. Then denomination determines the fate of good money.

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