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The optimal price of money

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  • Pedro Teles

Abstract

The optimal inflation tax is computed in monetary models where money is costly to supply. The models are simple general equilibrium models with money in the utility function or a transactions technology. The inflation tax is a means of raising taxes to finance exogenous government expenditures. The alternative means of revenue are also distortionary. The main point of this article is to show that the robustness of the optimality of the Friedman rule, of a zero nominal interest rate, resides in the assumption that money is produced at zero cost.

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Bibliographic Info

Article provided by Federal Reserve Bank of Chicago in its journal Economic Perspectives.

Volume (Year): (2003)
Issue (Month): Q II ()
Pages: 29-39

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Handle: RePEc:fip:fedhep:y:2003:i:qii:p:29-39:n:v.27no.2

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Related research

Keywords: Money ; Interest rates ; Inflation (Finance);

References

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  1. Isabel Correia & Juan Pablo Nicolini & Pedro Teles, 2002. "Optimal fiscal and monetary policy: equivalence results," Working Paper Series WP-02-16, Federal Reserve Bank of Chicago.
  2. Casey B. Mulligan & Xavier X. Sala-i-Martin, 1997. "The Optimum Quantity of Money: Theory and Evidence," NBER Working Papers 5954, National Bureau of Economic Research, Inc.
  3. Chari, V. V. & Christiano, Lawrence J. & Kehoe, Patrick J., 1996. "Optimality of the Friedman rule in economies with distorting taxes," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 203-223, April.
  4. Isabel Correia & Pedro Teles, 1999. "The Optimal Inflation Tax," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 325-346, April.
  5. Kimbrough, Kent P., 1986. "The optimum quantity of money rule in the theory of public finance," Journal of Monetary Economics, Elsevier, vol. 18(3), pages 277-284, November.
  6. Atkinson, A. B. & Stiglitz, J. E., 1972. "The structure of indirect taxation and economic efficiency," Journal of Public Economics, Elsevier, vol. 1(1), pages 97-119, April.
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Citations

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Cited by:
  1. Kim, Jinill & Ruge-Murcia, Francisco J., 2009. "How much inflation is necessary to grease the wheels?," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 365-377, April.
  2. KIM, Jinill & RUGE-MURCIA, Francisco J., 2009. "Monetary Policy When Wages Are Downwardly Rigid : Friedman Meets Tobin," Cahiers de recherche 15-2009, Centre interuniversitaire de recherche en ├ęconomie quantitative, CIREQ.
  3. Persson, Mats & Persson, Torsten & Svensson, Lars E O, 2005. "Time Consistency of Fiscal and Monetary Policy: A Solution," CEPR Discussion Papers 4941, C.E.P.R. Discussion Papers.
  4. Isabel Horta Correia & Pedro Teles, 2008. "Principles of Optimal Stabilization Policy," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.

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