Working Paper 404

The Optimum Quantity of Money Revisited

Timothy J. Kehoe | Consultant
David K. Levine | Visiting Scholar
Michael Woodford

Revised July 1, 1990

Abstract
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 seinorage 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)

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