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The Roles Of Money In An Economy And The Optimum Quantity Of Money

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  • Edgar L. Feige

    (University of Wisconsin-Madison)

  • M. Parkin

    (University of Manchester)

  • R Avery

    (University of Wisconsin-Madison)

  • C. Stones

    (University of Manchester)

Abstract

What is the optimum quantity of money in a society? This paper answers this question both from the perspective of a utility maximizing model with real balances in the utility function, and employing an inventory theoretic model which focuses attention on the costs of transacting in different markets and on the storage costs of holding money. We find that socially optimal transactions patterns and inventory holdings can be induced by paying interest on money and bonds equal to the net rate of return on capital. This conclusion is however only valid if it is costless for the society to institute and operate such an interest payment mechanism. In a world where it is costly to institute and operate an interest payment mechanism, a social optimum requires that the rate of return on money and bonds must equal the net rate of return on capital minus the social cost of inducing individuals to hold optimal quantities of financial assets. It is therefore necessary to take account of both the potential gains in welfare from instituting interest payments on money and the real potential costs of such a policy. Reference: Economica, November, 1973 pp. 416-431

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0501035.

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Length: 16 pages
Date of creation: 30 Jan 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0501035

Note: Type of Document - pdf; pages: 16
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Web page: http://128.118.178.162

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Cited by:
  1. Truman Bewley, 1979. "The Optimum Quantity of Money," Discussion Papers 383, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

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