Hot Money for a Cold Economy

David Andolfatto ()

No 2020-019, Working Papers from Federal Reserve Bank of St. Louis

Abstract: What is the theoretical justification for taxing unspent money transfers in a recession? To examine this question, I study a model economy where fiat money is necessary as a medium of exchange and, incidentally, serves as a store of value. This latter property is shown to open the door to business cycles and depressions driven entirely by speculation. Unconditional money transfers do not guarantee escape from a psychologically-induced depression. I demonstrate how money transfers subject to a short expiration date do eliminate speculative equilibria. This hot money policy compares favorably to negative interest rate policy because the latter taxes all money savings whereas the former only threatens to tax gifted money.

Keywords: Money; hoarding; depression; sunspot equilibria (search for similar items in EconPapers)
JEL-codes: B1 B2 E3 E4 E5 E6 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2020-07
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (1)

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DOI: 10.20955/wp.2020.019

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