The Optimum Quantity of Money: Theory and Evidence / Casey B. Mulligan, Xavier X. Sala-i-Martin.

Format:

Book

Author/Creator:

Mulligan, Casey B.

Contributor:

National Bureau of Economic Research.

Sala-i-Martin, Xavier X.

Series:

Working Paper Series (National Bureau of Economic Research) no. w5954.

NBER working paper series no. w5954

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

The Optimum Quantity of Money

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1997.

Summary:

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.

Notes:

Print version record

March 1997.