Fiat Value in the Theory of Value

Edward Prescott and Ryan Wessel

No 530, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: We explore monetary policy in a world without currency. In our world, money is a form of government debt that bears interest, which can be negative as well as positive. Services of money are a factor of production. We show that the national accounts must be revised in this world. Using our baseline economy, we determine the balanced growth paths for a set of money interest rate target policy regimes. Besides this interest rate, the only policy variable that differs across regimes is either the labor income tax rate or the inflation rate. We find that Friedman monetary satiation without deflation is possible. We also examine a set of inflation rate targeting regimes. Here, the only other policy variable that differs across policy regimes is the tax rate. There is a sequence of markets with outcome in each market being a Debreu valuation equilibrium, which determines the vector of assets and liabilities households take into the subsequent period. Evaluating a policy regime is an advanced exercise in public finance. Monetary satiation is not optimal even though money is costless to produce.

Keywords: 100 percent reserve banking; Inflation rate targeting; Money in production function; Friedman monetary satiation; Interest rate targeting (search for similar items in EconPapers)
JEL-codes: E00 E40 E50 E60 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2016-06-22
New Economics Papers: this item is included in nep-cba, nep-hpe, nep-mac and nep-mon
Note: This paper was previously titled "Monetary Policy with 100 Percent Reserve Banking: An Exploration."
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:530

DOI: 10.21034/sr.530

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