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A Theory of the Supply of Inside Money

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  • William Coleman

    ()

Abstract

This paper advances a theory of the supply of inside money that is squarely based on optimisation, and which sets out from the question, 'As outside money has an opportunity cost that a mere promise to pay outside money does not, why is outside money used at all?'. The theory identifies the nominal rate of return on capital as the key determinant of the supply of inside money. So just as the nominal rate of return on capital is the cost of demanding money, so the nominal rate of return is identified here as the reward for supplying (inside) money. And just as the demand for money is negatively related to the nominal rate of return on capital, so the supply of inside money is positively related to the nominal rate of return on capital.

Suggested Citation

  • William Coleman, 2007. "A Theory of the Supply of Inside Money," ANU Working Papers in Economics and Econometrics 2007-484, Australian National University, College of Business and Economics, School of Economics.
  • Handle: RePEc:acb:cbeeco:2007-484
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    File URL: https://www.cbe.anu.edu.au/researchpapers/econ/wp484.pdf
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    References listed on IDEAS

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    1. William Oliver Coleman, 2007. "The Causes, Costs and Compensations of Inflation," Books, Edward Elgar Publishing, number 3906.
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    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • 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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