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The Optimum Quantity of Money with Gold Reserves

Author

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  • Max Gillman

    ()

  • Charles Nolan

    ()

Abstract

Monetary policymakers target positive inflation. This divergence from the long accepted Friedman optimum of deflation is troubling: Why does theory seem so at odds with what policymakers view as optimal policy? Without ad hoc assumptions e.g., about price stickiness, the fundamental Friedman view that money’s marginal social cost of zero ought to equal the marginal social benefit (the nominal interest rate), remains unassailed and the optimum still is deflation. Presenting an economy where the central bank must hold gold reserves, the optimum is shown to be instead one of zero inflation, consistent with the Fisher price stability prescription.

Suggested Citation

  • Max Gillman & Charles Nolan, 2008. " The Optimum Quantity of Money with Gold Reserves," CDMA Conference Paper Series 0804, Centre for Dynamic Macroeconomic Analysis.
  • Handle: RePEc:san:cdmacp:0804
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    File URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0804.pdf
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    References listed on IDEAS

    as
    1. Cochrane, John H., 2005. "Money as stock," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 501-528, April.
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    More about this item

    Keywords

    Optimal monetary policy; The Friedman Rule.;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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