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The optimal price of money

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  • Pedro Teles

Abstract

The optimal inflation tax is computed in monetary models where money is costly to supply. The models are simple general equilibrium models with money in the utility function or a transactions technology. The inflation tax is a means of raising taxes to finance exogenous government expenditures. The alternative means of revenue are also distortionary. The main point of this article is to show that the robustness of the optimality of the Friedman rule, of a zero nominal interest rate, resides in the assumption that money is produced at zero cost.

Suggested Citation

  • Pedro Teles, 2003. "The optimal price of money," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 29-39.
  • Handle: RePEc:fip:fedhep:y:2003:i:qii:p:29-39:n:v.27no.2
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    References listed on IDEAS

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    1. Isabel Correia & Pedro Teles, 1999. "The Optimal Inflation Tax," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 325-346, April.
    2. Chari, V. V. & Christiano, Lawrence J. & Kehoe, Patrick J., 1996. "Optimality of the Friedman rule in economies with distorting taxes," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 203-223, April.
    3. Isabel Correia & Juan Pablo Nicolini & Pedro Teles, 2008. "Optimal Fiscal and Monetary Policy: Equivalence Results," Journal of Political Economy, University of Chicago Press, vol. 116(1), pages 141-170, February.
    4. Mulligan, Casey B & Sala-I-Martin, Xavier X, 1997. "The Optimum Quantity of Money: Theory and Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 687-715, November.
    5. Kimbrough, Kent P., 1986. "The optimum quantity of money rule in the theory of public finance," Journal of Monetary Economics, Elsevier, vol. 18(3), pages 277-284, November.
    6. William J. Baumol, 1952. "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 66(4), pages 545-556.
    7. Atkinson, A. B. & Stiglitz, J. E., 1972. "The structure of indirect taxation and economic efficiency," Journal of Public Economics, Elsevier, vol. 1(1), pages 97-119, April.
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    Cited by:

    1. Kim, Jinill & Ruge-Murcia, Francisco J., 2011. "Monetary policy when wages are downwardly rigid: Friedman meets Tobin," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 2064-2077.
    2. Mats Persson & Torsten Persson & Lars E. O. Svensson, 2006. "Time Consistency of Fiscal and Monetary Policy: A Solution," Econometrica, Econometric Society, vol. 74(1), pages 193-212, January.
    3. Isabel Horta Correia & Pedro Teles, 2008. "Principles of Optimal Stabilization Policy," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    4. Kim, Jinill & Ruge-Murcia, Francisco J., 2009. "How much inflation is necessary to grease the wheels?," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 365-377, April.

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    Keywords

    Money ; Interest rates ; Inflation (Finance);

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