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The Optimum Quantity of Money Revisited: Distortionary Taxation in a Search Model of Money

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  • Ritter Moritz

    ()
    (Temple University)

Abstract

This paper incorporates a distortionary tax into a micro-foundations of money framework and revisits the optimum quantity of money. The money constraint in the decentralized market plays a key role in the optimal policy. Only if the constraint is binding can fiscal policy increase the buyer's surplus; monetary, but not fiscal, policy affects the agents' bargaining position, leaving a special role for monetary policy. If the buyer's surplus share is inefficiently small, the intensive margin is distorted and the constrained optimal policy includes a money growth rate above that prescribed by the Friedman rule, even in the presence of fiscal policy instruments. This effect is also present under competitive pricing.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 10 (2010)
Issue (Month): 1 (June)
Pages: 1-26

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Handle: RePEc:bpj:bejmac:v:10:y:2010:i:1:n:14

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Cited by:
  1. Shouyong Shi, 2008. "Efficiency Improvement from Restricting the Liquidity of Nominal Bonds," Working Papers tecipa-329, University of Toronto, Department of Economics.
  2. Pere Gomis-Porqueras & Adrian Peralta-Alva, 2007. "Optimal Monetary and Fiscal Policies in a Search Theoretic Model of Monetary Exchange," 2007 Meeting Papers 84, Society for Economic Dynamics.

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