The Optimum Quantity of Money: Theory and Evidence

Casey Mulligan and Xavier Sala-i-Martin

No 5954, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper we propose a simple and general model for computing the Ramsey optimal inflation tax, which includes several models from the previous literature as special cases. We show that it cannot be claimed that the Friedman rule is always optimal (or always non-optimal) on theoretical grounds. The Friedman rule is optimal or not, depending on conditions related to the shape of various relevant functions. One contribution of this paper is to relate these conditions to measurable variables such as the interest rate or the consumption elasticity of money demand. We find that it tends to be optimal to tax money when there are economies of scale in the demand for money (the scale elasticity is smaller than one) and/or when money is required for the payment of consumption or wage taxes. We find that it tends to be optimal to tax money more heavily when the interest elasticity of money demand is small. We present empirical evidence on the parameters that determine the optimal inflation tax. Calibrating the model to a variety of empirical studies yields an optimal nominal interest rate of less than 1% per year, although that finding is sensitive to the calibration.

JEL-codes: E52 E61 (search for similar items in EconPapers)
Date: 1997-03
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (57)

Published as Journal of Money, Credit and Banking, Vol. 29, no. 4, part 2 (November 1997): 687-715
Published as Casey B. Mulligan & Xavier X. Sala-i-Martin & Frederic S. Mishkin & Jonas D. M. Fisher, 1997. "The optimum quantity of money: theory and evidence," Proceedings, Federal Reserve Bank of Cleveland, pages 687-724.

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Journal Article: The optimum quantity of money: theory and evidence (1997)
Journal Article: The Optimum Quantity of Money: Theory and Evidence (1997)
Working Paper: The optimum quantity of money: Theory and evidence (1997)
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