Optimal fiscal and monetary policy when money is essential

• Published in: Journal of economic theory Vol. 145; no. 5; pp. 1618 - 1647
• Main Authors: Aruoba, S. Borağan, Chugh, Sanjay K.
• Format: Journal Article
• Language: English
• Published: New York Elsevier Inc 01.09.2010; Elsevier; Elsevier Science Publishing Company, Inc
• Series: Journal of Economic Theory
• Subjects: Demand for money; Distortion; Documents; Economic models; Economics; Fiscal policy; Friction; Friedman Rule; Friedman Rule Intertemporal distortions Micro-founded models of money; Income; Inflation rate; Intertemporal distortions; Joints; Micro-founded models of money; Monetary dynamics; Monetary economics; Monetary policy; Monetary theory; Optimization; Policies; Studies; Tax rates; Taxation; E62; E52; E63; Friedman Rule; E13; Micro-founded models of money; Intertemporal distortions

We study optimal fiscal and monetary policy in an environment where explicit frictions give rise to valued money, making money essential in the sense that it expands the set of feasible trades. The two main results are that the Friedman Rule is typically not optimal, and the long-run capital income...