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

Ritter, Moritz (2007): The Optimum Quantity of Money Revisited: Distortionary Taxation in a Search Model of Money.

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Abstract

This paper incorporates a distortionary tax into the microfoundations of money framework and revisits the optimum quantity of money. An optimal policy may consist of both a positive tax rate and a positive nominal interest rate: if the buyer’s surplus share is inefficiently small, the intensive margin is distorted and the constrained optimal policy combines a sales tax with a money growth rate above that prescribed by the Friedman rule. Monetary, but not fiscal, policy alters the agent’s bargaining position, leaving a special role for a deviation from the Friedman rule. Under similar conditions, this conclusion carries over to competitive pricing.

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