The Optimum Quantity of Money Revisited: Distortionary Taxation in a Search Model of Money

Moritz Ritter

The B.E. Journal of Macroeconomics, 2010, vol. 10, issue 1, 26

Abstract: This paper incorporates a distortionary tax into a micro-foundations of money framework and revisits the optimum quantity of money. The money constraint in the decentralized market plays a key role in the optimal policy. Only if the constraint is binding can fiscal policy increase the buyer's surplus; monetary, but not fiscal, policy affects the agents' bargaining position, leaving a special role for monetary policy. If the buyer's surplus share is inefficiently small, the intensive margin is distorted and the constrained optimal policy includes a money growth rate above that prescribed by the Friedman rule, even in the presence of fiscal policy instruments. This effect is also present under competitive pricing.

Keywords: money; search; Friedman rule; sales tax (search for similar items in EconPapers)
Date: 2010
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Working Paper: The Optimum Quantity of Money Revisited: Distortionary Taxation in a Search Model of Money (2007)
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DOI: 10.2202/1935-1690.1835

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