THE ROLES OF MONEY IN AN ECONOMY AND THE OPTIMUM QUANTITY OF MONEY

Edgar Feige, Michael Parkin (), R Avery and C. Stones
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R Avery: University of Wisconsin-Madison
C. Stones: University of Manchester

Macroeconomics from University Library of Munich, Germany

Abstract: What is the optimum quantity of money in a society? This paper answers this question both from the perspective of a utility maximizing model with real balances in the utility function, and employing an inventory theoretic model which focuses attention on the costs of transacting in different markets and on the storage costs of holding money. We find that socially optimal transactions patterns and inventory holdings can be induced by paying interest on money and bonds equal to the net rate of return on capital. This conclusion is however only valid if it is costless for the society to institute and operate such an interest payment mechanism. In a world where it is costly to institute and operate an interest payment mechanism, a social optimum requires that the rate of return on money and bonds must equal the net rate of return on capital minus the social cost of inducing individuals to hold optimal quantities of financial assets. It is therefore necessary to take account of both the potential gains in welfare from instituting interest payments on money and the real potential costs of such a policy. Reference: Economica, November, 1973 pp. 416-431

JEL-codes: E31 E41 E50 E52 E59 G11 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2005-01-30
New Economics Papers: this item is included in nep-cba, nep-fin, nep-mac and nep-mon
Note: Type of Document - pdf; pages: 16
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0501035

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