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On the Utility of Money

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  • Gancho Todorov Ganchev

Abstract

The paper studies the concept of utility of money. The latter is defined as the ability to generate additional income. Utility of money is maximized by equalizing dynamic marginal utility of money and marginal cost. The subsequent differential equation links up income velocity of money acceleration and equilibrium convergence. It is proved that individuals’ utility of money maximization objectives may be aggregated at macro level and can be used for monetary policy optimization. Lagrangian multipliers technique is applied to obtain a relationship between income velocity of money and some supplementary constraints. The paper also makes distinction between short-term and long-term utility of money. Conclusions about different types of monetary policies are derived. The Appendix establishes connections with production and investment on the basis of optimal control technique.

Suggested Citation

  • Gancho Todorov Ganchev, 2010. "On the Utility of Money," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 32-60.
  • Handle: RePEc:bas:econst:y:2010:i:1:p:32-60
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    References listed on IDEAS

    as
    1. Reynard, Samuel, 2007. "Maintaining low inflation: Money, interest rates, and policy stance," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1441-1471, July.
    2. Milton Friedman, 1959. "The Demand for Money: Some Theoretical and Empirical Results," NBER Chapters,in: The Demand for Money: Some Theoretical and Empirical Results, pages 1-29 National Bureau of Economic Research, Inc.
    3. Dotsey, Michael & Sarte, Pierre Daniel, 2000. "Inflation uncertainty and growth in a cash-in-advance economy," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 631-655, June.
    4. Martin L. Weitzman, 1976. "On the Welfare Significance of National Product in a Dynamic Economy," The Quarterly Journal of Economics, Oxford University Press, vol. 90(1), pages 156-162.
    5. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232316, January.
    6. Asheim, Geir B. & Weitzman, Martin L., 2001. "Does NNP growth indicate welfare improvement?," Economics Letters, Elsevier, vol. 73(2), pages 233-239, November.
    7. Li, Chuan-Zhong & Löfgren, Karl-Gustaf, 2002. "On the Choice of Metrics in Dynamic Welfare Analysis: Utility versus Money Measures," Umeå Economic Studies 590, Umeå University, Department of Economics.
    8. Michael D. Bordo & Lars Jonung, 1986. "The Global Velocity Curve 1952-1982," NBER Working Papers 2074, National Bureau of Economic Research, Inc.
    9. Gillman M. & Siklos & P.L.Silver & J.L., 1996. "Money Velocity with Costly Credit," Department of Economics - Working Papers Series 515, The University of Melbourne.
    10. W A Razzak, 2001. "Money in the era of inflation targeting," Reserve Bank of New Zealand Discussion Paper Series DP2001/02, Reserve Bank of New Zealand.
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    More about this item

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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