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The optimum quantity of money revisited

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Author Info
Timothy J. Kehoe
David K. Levine
Michael Woodford

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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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Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 404.

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Date of creation: 1990
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Publication status: Published in Economic analysis of markets and games: Essays in honor of Frank Hahn (1992, pp. 501-526)
Handle: RePEc:fip:fedmwp:404

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Benhabib, Jess & Bull, Clive, 1983. "The Optimal Quantity of Money: A Formal Treatment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(1), pages 101-11, February. [Downloadable!] (restricted)
    Other versions:
  2. Hahn, F H, 1971. "Professor Friedman's Views on Money," Economica, London School of Economics and Political Science, vol. 38(149), pages 61-80, February. [Downloadable!] (restricted)
  3. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93. [Downloadable!] (restricted)
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  4. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September. [Downloadable!] (restricted)
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  5. 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, vol. 15(3), pages 750-77, October. [Downloadable!] (restricted)
  6. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November. [Downloadable!] (restricted)
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  7. Grandmont, Jean-Michel & Younes, Yves, 1973. "On the Efficiency of a Monetary Equilibrium," Review of Economic Studies, Blackwell Publishing, vol. 40(2), pages 149-65, April. [Downloadable!] (restricted)
  8. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. David K. Levine, 1991. "Asset Trading Mechanisms and Expansionary Policy," Levine's Working Paper Archive 43, David K. Levine. [Downloadable!]
  2. Alexei Deviatov, 2006. "Money Creation in a Random Matching Model," Working Papers w0081, Center for Economic and Financial Research (CEFIR). [Downloadable!]
  3. Edward J. Green & Ruilin Zhou, 2002. "Money as a mechanism in a Bewley economy," Working Paper Series WP-02-15, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
  4. Thorsten Hens & Klaus Reiner Schenk-Hoppé & Bodo Vogt, 2003. "On the Micro-foundations of Money: The Capitol Hill Baby-Sitting Co-op," Discussion Papers 03-35, University of Copenhagen. Department of Economics. [Downloadable!]
    Other versions:
  5. S. Rao Aiyagari & Ellen R. McGrattan, 1997. "The optimum quantity of debt," Staff Report 203, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  6. Claudio Mattalia, 2003. "Existence of solutions and asset pricing bubbles in general equilibrium models," ICER Working Papers - Applied Mathematics Series 02-2003, ICER - International Centre for Economic Research. [Downloadable!]
  7. Miquel Faig, 2000. "Money With Idiosyncratic Uninsurable Returns To Capital," Working Papers faig-00-01, University of Toronto, Department of Economics. [Downloadable!]
    Other versions:
  8. Alexei Deviatov, 2004. "Money creation in a random matching model," Money Macro and Finance (MMF) Research Group Conference 2003 24, Money Macro and Finance Research Group. [Downloadable!]
  9. Ayse Imrohoroglu & Edward C. Prescott, 1991. "Evaluating the welfare effects of alternative monetary arrangements," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-10. [Downloadable!]
  10. Timothy J. Kehoe & David K. Levine, 2000. "Liquidity Constrained vs. Debt Constrained Markets," Levine's Working Paper Archive 14, David K. Levine. [Downloadable!]
  11. Xavier Ragot, 2008. "The case for a financial approach to money demand," PSE Working Papers 2008-56, PSE (Ecole normale supérieure). [Downloadable!]
  12. Miguel Molico & Yahong Zhang, 2006. "Monetary Policy and the Distribution of Money and Capital," Computing in Economics and Finance 2006 136, Society for Computational Economics. [Downloadable!]
  13. Xavier Ragot, 2005. "The real effect of inflation in liquidity constrained models," PSE Working Papers 2005-51, PSE (Ecole normale supérieure). [Downloadable!]
  14. Yann Algan & Edouard Challe & Xavier Ragot, 2006. "Incomplete markets and the output-inflation tradeoff," PSE Working Papers 2006-45, PSE (Ecole normale supérieure), revised Mar 2008. [Downloadable!]
  15. Clark A. Burdick, 1997. "A transitional analysis of the welfare cost of inflation," Working Paper 97-15, Federal Reserve Bank of Atlanta. [Downloadable!]
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This page was last updated on 2009-11-26.

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