AbstractClassical models of money are typically based on a competitive market without capital or credit. They then impose exogenous timing structures, market participation constraints, or cash-in-advance constraints to make money essential. We present a simple model without credit where money arises from a fixed cost of production. This leads to a rich equilibrium structure. Agents avoid the fixed cost by taking vacations and the trade between workers and vacationers is supported by money. We show that agents acquire and spend money in cycles of finite length. Throughout such a "money cycle," agents decrease their consumption which we interpret as the hot potato effect of inflation. We give an example where money holdings do not decrease monotonically throughout the money cycle. Optimal monetary policy is given by the Friedman rule, which supports efficient equilibria. Thus, monetary policy provides an alternative to lotteries for smoothing out non-convexities.
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Bibliographic InfoPaper provided by University of St. Gallen, School of Economics and Political Science in its series Economics Working Paper Series with number 1102.
Length: 20 pages
Date of creation: Jan 2011
Date of revision:
Other versions of this item:
- NEP-ALL-2011-04-02 (All new papers)
- NEP-CBA-2011-04-02 (Central Banking)
- NEP-DGE-2011-04-02 (Dynamic General Equilibrium)
- NEP-MAC-2011-04-02 (Macroeconomics)
- NEP-MON-2011-04-02 (Monetary Economics)
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