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Money Cycles

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Abstract

Operating overheads are widespread and lead to concentrated bursts of activity. To transfer resources between active and idle spells, agents demand financial assets. Futures contracts and lotteries are unsuitable, as they have substantial overheads of their own. We show that money - under efficient monetary policy - is a liquid asset that leads to efficient allocations. Under all other policies, agents follow inefficient "money cycle" patterns of saving, activity, and inactivity. Agents spend their money too quickly - a "hot potato effect of inflation". We show that inflation can stimulate inefficiently high aggregate output.

Suggested Citation

  • Andrew Clausen & Carlo Strub, 2014. "Money Cycles," Edinburgh School of Economics Discussion Paper Series 249, Edinburgh School of Economics, University of Edinburgh.
    • Handle: RePEc:edn:esedps:249
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    File URL: http://www.econ.ed.ac.uk/papers/id249_esedps.pdf
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    Other versions of this item:

    • Andrew Clausen & Carlo Strub, 2016. "Money Cycles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(4), pages 1279-1298, November.

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The key to understand money: vacations
      by Economic Logician in Economic Logic on 2011-04-22 19:51:00

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