Transaction Process, Seigniorage Channel, and Monetary Effectiveness in Flexible Price Economy

Embedding seigniorage and transaction process into the RBC model, this paper proposes a new monetary economy, seigniorage channeled monetary economy, briefly SCME, in which monetary shocks can affect the real variables effectively and persistently in flexible price conditions. The mechanism of the effectiveness is the resource occupation effect of money issuance, in other words, money is a public goods and new money issuance is a form of taxation. The preliminary applications of SCME have clearly explained some notable puzzles or hotly debated issues in empirical studies, such as the price puzzle, the missing liquidity effect, the best inflation rate, the negative movement of hours under a positive technology shock, and the Friedman rule. In addition, we obtained interactive pricing, origin of money market interest rate, the best money market interest rate, and the best tax rate (in other words, the best government debt level) in this paper, and there is no forward guidance puzzle in SCME. Because resource allocation in the unique equilibrium of SCME is Pareto optimal, which is starkly different from the existing theories' sub-optimal result for the monetary and fiscal economy, a profound consequence of SCME is that it is a proof of the Invisible Hand Conjecture of Adam Smith in the economy with tax and money.