Optimum Quantity Of Money Research Articles

The Nature of Money in a Convertible Currency World

In a world where the means of exchange is convertible into the numeraire consumption good at a fixed rate, no one wants to hold money over time – and due to convertibility there is no means by which the Friedman rule can generate deflation. This is the environment we study in this paper in order to demonstrate that there is still a way to reach the first-best: institutionalize the naked shorting of the unit of account, or in other words establish a banking system.
 To motivate the benefits of a banking system, the environment has real productivity shocks that are constantly changing the optimal level of economic activity, so the optimal quantity of money is inherently stochastic. Efficiency in such an environment requires the capacity to expand the money supply on an “as needed” basis. We show how a debt-based payments system that relies on banks to certify the individual debtors’ IOUs addresses the monetary problem.
 This model explains (i) central bank monetary policy as a means of stabilizing the banking system and (ii) usury laws as means of promoting equilibria that favor non-banks over those that favor banks. Furthermore, by modeling a commercial bank-based monetary system as an efficient solution to a payments problem this paper develops a theoretic framework that may be used to evaluate central bank digital currency proposals.

The Welfare Implications of Massive Money Injection: The Japanese Experience from 2013 to 2020

AbstractThe present paper derives a money demand function that explicitly takes the costs of storing money into account. This function is then used to examine the consequences of the large‐scale money injection conducted by the Bank of Japan since April 2013. The main findings are as follows. First, the opportunity cost of holding money calculated using 1‐year government bond yields has been negative since the fourth quarter of 2014 and most recently (2020:Q2) was −0.2%. Second, the marginal cost of storing money, which was 0.3% in the most recent quarter, exceeds the marginal utility of money, which was 0.1%. Third, the optimal quantity of money, measured by the ratio of M1 to nominal gross domestic product, is 1.2. In contrast, the actual money‐income ratio in the most recent quarter was 1.8. The welfare loss relative to the maximum welfare obtained under the optimal quantity of money in the most recent quarter was 0.2% of nominal gross domestic product. The findings imply that the Bank of Japan needs to reduce M1 by more than 30%, for example through measures that impose a penalty on holding money.

The optimal quantity of money and partially-liquid assets

In a monetary economy à la Williamson (2012), in which a competitive financial sector insures agents facing idiosyncratic liquidity risk on interest-bearing assets, we introduce a competitive market for liquidity reallocation and study optimal policy. We show that, at any inflation rate above the Friedman rule, the market is a welfare-improving risk-sharing mechanism over Williamson's (2012) deposit contract. The optimal policy requires real asset scarcity, which increases the demand for money, and shrinks consumption inequality between asset and money users. Also, we demonstrate that the equilibrium deposit contract with re-trading opportunities in the asset market replicates the market allocations.

The Nature of Money in a Convertible Currency World

In a world where the means of exchange is convertible into the numeraire consumption good at a fixed rate, no one wants to hold money over time – and due to convertibility there is no means by which the Friedman rule can generate deflation. This is the environment we study in this paper in order to demonstrate that there is still a way to reach the first-best: institutionalize the naked shorting of the unit of account, or in other words establish a banking system. To motivate the benefits of a banking system, the environment has real productivity shocks that are constantly changing the optimal level of economic activity, so the optimal quantity of money is inherently stochastic. Efficiency in such an environment requires the capacity to expand the money supply on an “as needed” basis. We show how a debt-based payments system that relies on banks to certify the individual debtor’s IOUs addresses the monetary problem. This models explains (i) central bank monetary policy as a means of stabilizing the banking system and (ii) usury laws as means of promoting equilibria that favor non-banks over those that favor banks.

Money Is Debt

This paper uses a new monetarist framework to present and explain the basic elements of a non-monetarist theory of money, classical banking theory, by modeling acceptance banking, the form of banking that was dominant during the 19th century when the theory was developed. The most important principle of classical banking theory is that the money supply must be able to expand to meet unpredictable “needs of trade.” Underlying this approach is the view that the optimal quantity of money is inherently stochastic due to real productivity shocks that are constantly changing the optimal level of economic activity. The basic premise of classical banking theory is that transactions are typically paid for by incurring debt, and that the role of the banking system is the monetization of this transaction-based debt. In this framework bank liabilities are the principal form of money, and they circulate because they are backed by debt that can be repaid by depositing bank liabilities into one’s account. When fiat money is introduced into the model we find that non-banks are willing to carry fiat money from one period to the next because it is a non-interest-bearing asset and reduces the costs of borrowing to transact.The paper also explains how the model can be reinterpreted as a model of the modern banking system.

The Effects of Interest Rate on the Optimal Consumption Path in a Bewley Model with the Co-existence of Currency and Credit

The Effects of Interest Rate on the Optimal Consumption Path in a Bewley Model with the Co-existence of Currency and Credit

Efficient online exchange via fiat money

In many online systems, individuals provide services for each other; the recipient of the service obtains a benefit but the provider of the service incurs a cost. If benefit exceeds cost, provision of the service increases social welfare and should therefore be encouraged—but the individuals providing the service gain no (immediate) benefit from providing the service and hence have an incentive to withhold service. Hence, there is scope for designing a protocol that improves welfare by encouraging exchange. To operate successfully within the confines of the online environment, such a protocol should be distributed, robust, and consistent with individual incentives. This paper proposes and analyzes protocols that rely solely on the exchange of fiat money or tokens. The analysis has much in common with work on search models of money but the requirements of the environment also lead to many differences from previous analyses—and some surprises; in particular, existence of equilibrium becomes a thorny problem and the optimal quantity of money is different.

A new perspective on the Gold Standard: Inflation as a population phenomenon

The purpose of this paper is to contribute a new model of the Gold Standard, focusing on the interaction between resource scarcity and demographics. In a dynamic micro-founded model we find that: i) prices and equilibrium gold holdings increase with population (a scale effect), but decrease with the population growth rate; ii) that the Gold Standard implies deflation unless extraction resources outstrip population growth; and iii) there is no optimal quantity of money. The predictions of the model are examined using a structural VAR. Our results also shed light on debates about the viability of a return to the Gold Standard, and, more generally, on the interaction between policy variables and scarce resources.

Friedman meets Becker and Mulligan in a monetary neoclassical growth model

We study a neoclassical growth model with the time preference determined by resources spent on imagining future pleasures along the line of Becker and Mulligan (Q J Econ 112:729–758, 1997). We introduce money into the economy via a cash-in-advance constraint and study the effect of higher seignorage taxes or higher monetary growth rates on capital, consumption and welfare in the long run. We find that if the fraction of investment constrained by cash is smaller than a threshold, the negative-monetary-growth Friedman (The Optimum Quantity of Money and Other Essays, 1969) rule does not hold and the optimal inflation rate is positive. Calibrating our model yields a mild optimal inflation rate per annum with a switch from zero inflation to optimal inflation creating a sizable welfare gain in terms of consumption equivalence.

O valor da moeda e a teoria dos preços dos ativos

Este artigo usa o enfoque da teoria dos precos dos ativos na determinacao do preco da moeda para apresentar uma resenha concisa sobre os seguintes topicos da teoria monetaria: i) preco da moeda: bolhas versus fundamentos; ii) equilibrio multiplo; iii) indeterminacao do nivel de preco ; iv) quantidade otima de moeda ; v) hiperinflacao; vi) substituicao de moeda e vii) rigidez do preco no curto prazo.

On the optimum quantity of money

It is pretty well established within Austrian economics that the optimum quantity of money is whatever level is established at any given time. The logical implication of this claim is that any amount of the commodity that intermediates trade will do as well as any other in acquitting this task. This being the case, there is no social or even private gain to be obtained by anyone adding to the money stock. The present paper challenges this view, but from within the praxeological tradition. That is, we shall argue that although prominent Austrian economists have indeed made this argument, they are incorrect from their own basic perspective, which is shared in full by the present authors. Our thesis, in contrast to theirs, is that “more is better,” or, more strictly speaking, at the very least it is possible that additional stocks of money can make a positive contribution to economic welfare. Given that we are making a frontal attack on economists with whom we agree on virtually all other issues1 in the dismal science, it behooves us to be very careful in documenting the charge we are about to bring. Accordingly, we quote quite fully from several leaders of the Austrian School, in order to obviate any possible misconstruction of their position. But before we introduce our extensive quotations from Mises and Rothbard, for these are the economists against whose views we shall be contending, let us mention a possible misinterpretation of our own position, and attempt to obviate it.

On the Micro-Foundations of Money: The Capitol Hill Baby-Sitting Co-Op

This paper contributes to the micro-foundation of money in centralized markets with idiosyncratic uncertainty. It shows existence of stationary monetary equilibria and ensures that there is an optimum quantity of money. The rational solution of our model is compared with actual behavior in a laboratory experiment. The experiment gives support to the theoretical approach.

Self-Insurance, Social Insurance, and the Optimum Quantity of Money

Self-Insurance, Social Insurance, and the Optimum Quantity of Money

On the Micro-foundations of Money: The Capitol Hill Baby-Sitting Co-op

We suggest a new micro-foundation of money in which markets are well-organized but consumers' preferences are stochastic. In this model, we solve for stationary equilibria and show that there is an optimum quantity of money. The rational solution of our model is compared with actual behavior in a laboratory experiment. It turns out that the experiment gives support to our theoretical results.

Money and credit in liquidity provision

This paper studies the liquidity provision in a model where the roles of money are challenged by other financial instruments. Alternative to money, credit can be used as means of payment and rate dominating assets are available to serve as stores of value. Two features are found to be crucial in rendering money valuable in this environment: information asymmetry in credit trading relationship and uncertainty in individuals' liquidity demand. In general, the model economy can display a payment mechanism of money-only, credit-only, or mixed-use of money and credit in transactions, depending on the severity of the information asymmetry. The optimal quantity of money in our paper is shown to contrast those in other monetary models.

Habit formation in a monetary growth model

This paper introduces the hypothesis of habit formation in consumption in the Sidrauski [Am. Econ. Rev. Papers Proc., 57 (1967) 534] model. A number of results are derived: (1) as in the Sidrauski model money is superneutral and the Friedman rule still provides the optimal quantity of money; (2) the demand for money in this model is greater than in the Sidrauski model; (3) the money demand reflects the habit persistence related to past consumption and the rate of time preference, and it is more sensitive to changes in inflation and nominal interest rates than the Sidrauski model.

AN INTERVIEW WITH MILTON FRIEDMAN

AN INTERVIEW WITH MILTON FRIEDMAN

La quantité optimale de monnaie dans un modèle avec appariements aléatoires

This article determines the optimum quantity of money for various extensions of the search-theoretic model of fiat money and examines the robustness of the KIYOTAKI and WRIGHT's results in the presence of money and inventory holdings. In the case of a bound on money holdings, the optimum quantity of money is reached when the distribution of money among agents is uniform. The choice of this upper bound by rational agents generates multiple equilibria.

Providing for the optimum quantity of money

The optimum quantity of money proposition, whose validity is agreed on, is actually open to criticism. The present paper argues that the weaknesses of the Friedman Rule from the application of the welfare theorems of general equilibrium theory to a monetary economy and shows how, the consistency of the criticism notwithstanding, the optimal solution can still be implemented.

Price Level Determinacy and Monetary Policy under a Balanced Budget Requirement

This paper analyzes the implications of a balanced budget fiscal policy rule for the determinacy of the price level in a cash-in-advance economy under three alternative monetary policy regimes. It shows that, in such stylized models with flexible prices and a period-by-period balanced budget requirement, the price level is determinate under a money growth rate peg and is indeterminate under a pure nominal interest rate peg. Under a feedback rule whereby the nominal interest rate is set as an increasing function of the inflation rate, the price level is determinate for intermediate values of the inflation elasticity of the feedback rule and is indeterminate for both very low and very high values of the inflation elasticity. Finally, regardless of the particular monetary policy specification, a rational expectations equilibrium consistent with the optimal quantity of money may not exist.