A monetary economy with counterfeiting

We apply a search-theoretic model of fiat money to study the equilibria in which counterfeit money is accepted. Circulation of counterfeit money presupposes that the agents are impatient and that the punishment for holding it is not too severe. When the stock of genuine money is small counterfeit money may improve the efficiency of the economy. We establish that a monetary economy can be created with private provision of (counterfeit) money as long as the ruler has control over punishments. Totally noncooperative provision will fail as the economy will become flooded with money.