Renovatio Monetae: When Gesell Taxes Worked

Gesell taxes on money have recently received attention as a way of alleviating the zero lower bound on interest rates. Less known is that such taxes generated seigniorage in medieval Europe for around two centuries. When a Gesell tax was levied, current coins ceased to be legal and had to be exchanged into new coins for a fee. Using a cash‐in‐advance model, we analyze under what conditions agents exchange coins and the tax generates revenues. A low exchange fee, high punishments for using old coins, and a long time period between re‐mintings induce people to use new coins.