The Optimum Quantity of Money with Gold Reserves

Max Gillman and Charles Nolan

CDMA Conference Paper Series from Centre for Dynamic Macroeconomic Analysis

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.

Keywords: Optimal monetary policy; The Friedman Rule. (search for similar items in EconPapers)
JEL-codes: E42 E58 E61 (search for similar items in EconPapers)
Date: 2008-09
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