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The Optimum Quantity of Money Revisited

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  • Timothy J. Kehoe
  • David K. Levine
  • Michael Woodford

Abstract

This paper uses a simple general equilibrium model in which agents use money holdings to self insure to address the classic question: What is the optimal rate of change of the money supply? The standard answer to this question, provided by Friedman, Bewley, Townsend, and others, is that this rate is negative. Because any revenues from seignorage in our model are redistributed in lump-sum form to agents and this redistribution improves insurance possibilities, we find that the optimal rate is sometimes positive. We also discuss the measurement of welfare gains or losses from inflation and their quantitative significance.

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Bibliographic Info

Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 2035.

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Date of creation: 31 Dec 1992
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Handle: RePEc:cla:levarc:2035

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Web page: http://www.dklevine.com/

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  1. Cooley, T.F. & Hansen, G.D., 1988. "The Inflation Tax In A Real Business Cycle Model," RCER Working Papers 155, University of Rochester - Center for Economic Research (RCER).
  2. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Brock, William A, 1974. "Money and Growth: The Case of Long Run Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(3), pages 750-77, October.
  4. Benhabib, Jess & Bull, Clive, 1981. "The Optimal Quantity of Money: A Formal Treatment," Working Papers, C.V. Starr Center for Applied Economics, New York University 81-11, C.V. Starr Center for Applied Economics, New York University.
  5. Hahn, F H, 1971. "Professor Friedman's Views on Money," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 38(149), pages 61-80, February.
  6. Martin L. Weitzman, 1973. "Duality Theory for Infinite Horizon Convex Models," Management Science, INFORMS, INFORMS, vol. 19(7), pages 783-789, March.
  7. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, Econometric Society, vol. 54(1), pages 23-45, January.
  8. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
  9. GRANDMONT, Jean-Michel & YOUNES, Yves, . "On the efficiency of a monetary equilibrium," CORE Discussion Papers RP -135, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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