dist_tax - The Optimum Quantity of Money Revisited:...

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Unformatted text preview: The Optimum Quantity of Money Revisited: Distortionary Taxation in a Search Model of Money Moritz Ritter February 2007 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 buyers surplus share is ineciently 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 scal, policy alters the agents bargaining position, leaving a special role for a deviation from the Friedman rule. Under similar conditions, this conclusion carries over to competitive pricing. I am thankful to Shouyong Shi for his support and guidance. This paper has beneted from comments by and discussions with Andres Erosa and Miquel Faig. I also received valuable comments from seminar participants at the University of Toronto. All remaining errors and shortcomings are my own. Department of Economics, University of Toronto, 140 St. George Street, Suite 707, Toronto, ON, M5S 3G7, Canada. Email: m.ritter@utoronto.ca Keywords: Money, Search, Friedman Rule, Sales Tax JEL Classifcation: E62, E63, H21 1. Introduction The Friedman rule has been one o the key doctrines o monetary theory or which traditional monetary economics has provided extensive support over the past decades. These traditional models rely on short-cuts, such as money-in-the-utility-unction and cash-in-advance, to introduce money into their environments. Conversely, the microoundations o money literature that does not resort to these shortcuts has pointed to a potential trade-o between the number o transactions (the extensive margin) and the quantity o goods exchanged in each trade (the intensive margin), which may render the Friedman rule a suboptimal monetary policy. However, these monetary search models have thus ar mostly ignored fscal policy, whose absence could potentially drive the shortall o the Friedman rule ination may serve as a substitute or fscal policy. This paper incorporates fscal policy considerations by introducing a sales tax into the monetary search environment, and revisits the optimum quantity o money. As such, it links the microoun- dations o money to the traditional money and public fnance literature. The key fnding is that deviating rom the Friedman rule, i.e. setting a positive nominal interest rate, may result in welare gains ination is not a mere substitute or omitted fscal policy. In act, the suboptimality o the Friedman rule arrises even i no government revenue is needed; the deviation may help to improve eciency in the number o matches, a eature nonexistent in the traditional literature, which does 2 not model the extensive margin of trade....
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dist_tax - The Optimum Quantity of Money Revisited:...

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