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Licensed Unlicensed Requires Authentication Published by De Gruyter June 11, 2010

The Optimum Quantity of Money Revisited: Distortionary Taxation in a Search Model of Money

  • Moritz Ritter

This paper incorporates a distortionary tax into a micro-foundations of money framework and revisits the optimum quantity of money. The money constraint in the decentralized market plays a key role in the optimal policy. Only if the constraint is binding can fiscal policy increase the buyer's surplus; monetary, but not fiscal, policy affects the agents' bargaining position, leaving a special role for monetary policy. If the buyer's surplus share is inefficiently small, the intensive margin is distorted and the constrained optimal policy includes a money growth rate above that prescribed by the Friedman rule, even in the presence of fiscal policy instruments. This effect is also present under competitive pricing.

Published Online: 2010-6-11

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