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Efficiency in a Pure Currency Economy with Inflation

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  • Taub, B

Abstract

Individuals who are buffeted by stochastic shocks will wish to substitute consumption intertemporally. To effect this substitution, they can enter into insurance contracts, or they can use money. This paper investigates the connection between optimum insurance and Milton Friedman's (1969) concept of the optimum quantity of money, using a simplified version of Robert E. Lucas's (1980) pure currency economy. Monetary efficiency and efficient insurance are equivalent here. An example is presented in which an efficient monetary equilibrium exists. Contrary to Truman Bewley's (1983) conjecture, in the example, the efficient rate of return on real balances is less than the internal rate of discount. Copyright 1988 by Oxford University Press.

Suggested Citation

  • Taub, B, 1988. "Efficiency in a Pure Currency Economy with Inflation," Economic Inquiry, Western Economic Association International, vol. 26(4), pages 567-583, October.
    • Handle: RePEc:oup:ecinqu:v:26:y:1988:i:4:p:567-83
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    Cited by:

    1. Faig, Miquel, 2000. "Money with Idiosyncratic Uninsurable Returns to Capital," Journal of Economic Theory, Elsevier, vol. 94(2), pages 218-240, October.
    2. Andolfatto, David, 2013. "Incentive-feasible deflation," Journal of Monetary Economics, Elsevier, vol. 60(4), pages 383-390.
    3. Levine, David K., 1991. "Asset trading mechanisms and expansionary policy," Journal of Economic Theory, Elsevier, vol. 54(1), pages 148-164, June.
    4. Sergio Salas, 2017. "Asset prices and wealth inequality in a simple model with idiosyncratic shocks," Estudios de Economia, University of Chile, Department of Economics, vol. 44(1 Year 20), pages 105-119, June.
    5. Sergio Salas, 2018. "On financial deepening and long-run growth," Journal of Economics, Springer, vol. 123(3), pages 249-276, April.
    6. Salas, Sergio, 2013. "Credit frictions and unexpected credit crunches," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 161-181.

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