Sunday, September 04, 2005

How government determines supply of coins and currency

"A government's monetary authority sets prices; the public chooses quantities. The monetary authority sets the prices by offering to convert unlimited quantities of different denominations of currency and coins at fixed exchange rates (e.g., the U.S. government stands ready to buy or sell a quarterr for five nickels). With an eye toward controlling an overall index of the price of goods and services, the monetary authority also sets the total quantity of government currency and coins (the supply of "base money") but it does not choose its composition across denominations."
--pg. XVII, Thomas Sargent and Francois Velde, The Big Problem of Small Change.

I don't understand why in a poor country like Senegal there is a constant problem of lack of small change. This is apparently widespread and perhaps derives from something to do with limited access to banks; alternatively, it is a fact that every bill I had in Senegal was printed in 2003, so maybe the above described system isn't the system used in Senegal (the cfa zone) to determine the composition of coins and currency and the system in use is screwy. I don't know.


Blogger henry said...

If only the government would just let the price of nickels and dimes float...

9:56 PM  

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