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

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  • Ritter, Moritz

Abstract

This paper incorporates a distortionary tax into the microfoundations of money framework and revisits the optimum quantity of money. An optimal policy may consist of both a positive tax rate and a positive nominal interest rate: if the buyer’s surplus share is inefficiently small, the intensive margin is distorted and the constrained optimal policy combines a sales tax with a money growth rate above that prescribed by the Friedman rule. Monetary, but not fiscal, policy alters the agent’s bargaining position, leaving a special role for a deviation from the Friedman rule. Under similar conditions, this conclusion carries over to competitive pricing.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 1973.

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Date of creation: 27 Feb 2007
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Handle: RePEc:pra:mprapa:1973

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Keywords: Money; Search; Friedman Rule; Sales Tax;

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References

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  1. Allen Head & Alok Kumar, 2004. "Price Dispersion, Inflation and Welfare," NajEcon Working Paper Reviews, www.najecon.org 122247000000000241, www.najecon.org.
  2. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, Elsevier, vol. 81(2), pages 232-251, August.
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  4. Dale T. Mortensen & Christopher A. Pissarides, 1993. "Job Creation and Job Destruction in the Theory of Unemployment," CEP Discussion Papers, Centre for Economic Performance, LSE dp0110, Centre for Economic Performance, LSE.
  5. Kimbrough, Kent P., 1986. "The optimum quantity of money rule in the theory of public finance," Journal of Monetary Economics, Elsevier, Elsevier, vol. 18(3), pages 277-284, November.
  6. Pere Gomis-Porqueras & Adrian Peralta-Alva, 2008. "Optimal monetary and fiscal policies in a search theoretic model of monetary exchange," Working Papers, Federal Reserve Bank of St. Louis 2008-015, Federal Reserve Bank of St. Louis.
  7. Shi Shouyong, 1997. "Search for a Monetary Propagation Mechanism," Working Papers, Queen's University, Department of Economics 966, Queen's University, Department of Economics.
  8. Li, Victor E, 1995. "The Optimal Taxation of Fiat Money in Search Equilibrium," 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. 36(4), pages 927-42, November.
  9. Shi, Shouyong, 1999. "Search, inflation and capital accumulation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 44(1), pages 81-103, August.
  10. Guillaume Rocheteau & Randall Wright, 2003. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," PIER Working Paper Archive, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania 03-031, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  11. Aleksander Berentsen & Guillaume Rocheteau & Shouyong Shi, . "Friedman Meets Hosios: Efficiency in Search Models of Money," IEW - Working Papers, Institute for Empirical Research in Economics - University of Zurich 154, Institute for Empirical Research in Economics - University of Zurich.
  12. V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimality of the Friedman Rule in Economies with Distorting Taxes," NBER Working Papers, National Bureau of Economic Research, Inc 4443, National Bureau of Economic Research, Inc.
  13. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(3), pages 463-484, June.
  14. Boragan Aruoba, S. & Rocheteau, Guillaume & Waller, Christopher, 2007. "Bargaining and the value of money," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(8), pages 2636-2655, November.
  15. Correia, Isabel & Teles, Pedro, 1996. "Is the Friedman rule optimal when money is an intermediate good?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 38(2), pages 223-244, October.
  16. Faig, Miquel, 1988. "Characterization of the optimal tax on money when it functions as a medium of exchange," Journal of Monetary Economics, Elsevier, Elsevier, vol. 22(1), pages 137-148, July.
  17. Sanjay K. Chugh & S. Boragan Aruoba, 2009. "Money and Optimal Capital Taxation," 2009 Meeting Papers, Society for Economic Dynamics 69, Society for Economic Dynamics.
  18. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 57(2), pages 279-98, April.
  19. Sanjay K. Chugh & S. Boragan Aruoba, 2007. "Optimal Fiscal and Monetary Policy when Money is Essential," 2007 Meeting Papers, Society for Economic Dynamics 80, Society for Economic Dynamics.
  20. Muthoo,Abhinay, 1999. "Bargaining Theory with Applications," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521576475.
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Cited by:
  1. Shouyong Shi, 2008. "Efficiency Improvement from Restricting the Liquidity of Nominal Bonds," Working Papers, University of Toronto, Department of Economics tecipa-329, University of Toronto, Department of Economics.
  2. Gomis-Porqueras, Pedro & Peralta-Alva, Adrian, 2010. "Optimal monetary and fiscal policies in a search theoretic model of monetary exchange," European Economic Review, Elsevier, Elsevier, vol. 54(3), pages 331-344, April.

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