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Efficiency in a Pure Currency Economy with Inflation

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  • Taub, B
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    Abstract

    Individuals who are buffeted by stochastic shocks will wish to substitute consumption intertemporally. To effect this substitution, they can enter into insurance contracts, or they can use money. This paper investigates the connection between optimum insurance and Milton Friedman's (1969) concept of the optimum quantity of money, using a simplified version of Robert E. Lucas's (1980) pure currency economy. Monetary efficiency and efficient insurance are equivalent here. An example is presented in which an efficient monetary equilibrium exists. Contrary to Truman Bewley's (1983) conjecture, in the example, the efficient rate of return on real balances is less than the internal rate of discount. Copyright 1988 by Oxford University Press.

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    Bibliographic Info

    Article provided by Western Economic Association International in its journal Economic Inquiry.

    Volume (Year): 26 (1988)
    Issue (Month): 4 (October)
    Pages: 567-83

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    Handle: RePEc:oup:ecinqu:v:26:y:1988:i:4:p:567-83

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    Cited by:
    1. Levine, David K., 1991. "Asset trading mechanisms and expansionary policy," Journal of Economic Theory, Elsevier, vol. 54(1), pages 148-164, June.
    2. Faig, Miquel, 2000. "Money with Idiosyncratic Uninsurable Returns to Capital," Journal of Economic Theory, Elsevier, vol. 94(2), pages 218-240, October.
    3. Andolfatto, David, 2013. "Incentive-feasible deflation," Journal of Monetary Economics, Elsevier, vol. 60(4), pages 383-390.
    4. Salas, Sergio, 2013. "Credit frictions and unexpected credit crunches," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 161-181.

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