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The Optimum Quantity of Money Revisited

Working Paper 404 | Published July 1, 1990

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Timothy J. Kehoe Consultant, University of Minnesota, and National Bureau of Economic Research
David K. Levine Visiting Scholar
The Optimum Quantity of Money Revisited


This paper uses a simple general equilibrium model in which agents use money holdings to self insure to address the classic question: What is the optimal rate of change of the money supply? The standard answer to this question, provided by Friedman, Bewley, Townsend, and others, is that this rate is negative. Because any revenues from seigniorage in our model are redistributed in lump-sum form to agents and this redistribution improves insurance possibilities, we find that the optimal rate is sometimes positive. We also discuss the measurement of welfare gains or losses from inflation and their quantitative significance.

Published in: _Economic Analysis of Markets and Games: Essays in Honor of Frank Hahn_ (1992, pp. 501-526).