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The Optimum Quantity of Money: Theory and Evidence

  • Mulligan, Casey B
  • Sala-I-Martin, Xavier X

The authors' model for computing the Ramsey optimal inflation tax includes several models from the previous literature as special cases. The model highlights the various assumptions in that literature that have led to such different results, assumptions that relate to the interest and scale elasticities of money demand and how they vary with the interest rate, whether money is required to pay taxes, and the nature of transactions when interest rates are very low. Calibrating the model to a variety of empirical studies yields an optimal nominal interest rate of less than 1 percent per year, although that finding is sensitive to the calibration. Copyright 1997 by Ohio State University Press.

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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 29 (1997)
Issue (Month): 4 (November)
Pages: 687-715

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Handle: RePEc:mcb:jmoncb:v:29:y:1997:i:4:p:687-715
Contact details of provider: Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Casey B. Mulligan & Xavier Sala-i-Martin, 1996. "Adoption of Financial Technologies: Implications for Money Demand and Monetary Policy," NBER Working Papers 5504, National Bureau of Economic Research, Inc.
  2. Robert E. Lucas Jr. & Nancy L. Stokey, 1984. "Money and Interest in Cash-In-Advance Economy," Discussion Papers 628, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Casey B. Mulligan, 1997. "The demand for money by firms: some additional empirical results," Discussion Paper / Institute for Empirical Macroeconomics 125, Federal Reserve Bank of Minneapolis.
  4. Casey B. Mulligan, . "The Intertemporal Substitution of Work--What Does the Evidence Say?," University of Chicago - Population Research Center 95-11, Chicago - Population Research Center.
  5. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  6. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  7. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Braun, R. Anton, 1994. "How large is the optimal inflation tax?," Journal of Monetary Economics, Elsevier, vol. 34(2), pages 201-214, October.
  9. V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimality of the Friedman Rule in Economies with Distorting Taxes," NBER Working Papers 4443, National Bureau of Economic Research, Inc.
  10. Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 271-291, March.
  11. Karni, Edi, 1973. "The Transactions Demand for Cash: Incorporation of the Value of Time into the Inventory Approach," Journal of Political Economy, University of Chicago Press, vol. 81(5), pages 1216-25, Sept.-Oct.
  12. Guidotti, Pablo E. & Vegh, Carlos A., 1993. "The optimal inflation tax when money reduces transactions costs : A reconsideration," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 189-205, April.
  13. 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.
  14. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  15. Lucas, Robert E., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 137-167, January.
  16. Casey B. Mulligan & Xavier Sala-I-Martin, 1992. "U.S. Money Demand: Surprising Cross-Sectional Estimates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 285-343.
  17. 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.
  18. Allan H. Meltzer, 1963. "The Demand for Money: A Cross-Section Study of Business Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 77(3), pages 405-422.
  19. Karni, Edi, 1974. "The Value of Time and the Demand for Money," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 6(1), pages 45-64, February.
  20. Faig, Miquel, 1988. "Characterization of the optimal tax on money when it functions as a medium of exchange," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 137-148, July.
  21. Mroz, Thomas A, 1987. "The Sensitivity of an Empirical Model of Married Women's Hours of Work to Economic and Statistical Assumptions," Econometrica, Econometric Society, vol. 55(4), pages 765-99, July.
  22. Allan H. Meltzer, 1963. "The Demand for Money: The Evidence from the Time Series," Journal of Political Economy, University of Chicago Press, vol. 71, pages 219.
  23. Woodford, Michael, 1990. "The optimum quantity of money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 20, pages 1067-1152 Elsevier.
  24. Martin S. Feldstein, 1997. "The Costs and Benefits of Going from Low Inflation to Price Stability," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 123-166 National Bureau of Economic Research, Inc.
  25. Mulligan, Casey B, 1997. "Scale Economies, the Value of Time, and the Demand for Money: Longitudinal Evidence from Firms," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1061-79, October.
  26. King, Robert G., 1988. "Money demand in the United States: A quantitative review," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 29(1), pages 169-172, January.
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