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Hot Money for a Cold Economy

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  • David Andolfatto

Abstract

What is the theoretical justification for taxing unspent money transfers in a recession? To examine this question, I study a model economy where fiat money is necessary as a medium of exchange and, incidentally, serves as a store of value. This latter property is shown to open the door to business cycles and depressions driven entirely by speculation. Unconditional money transfers do not guarantee escape from a psychologically-induced depression. I demonstrate how money transfers subject to a short expiration date do eliminate speculative equilibria. This hot money policy compares favorably to negative interest rate policy because the latter taxes all money savings whereas the former only threatens to tax gifted money.

Suggested Citation

  • David Andolfatto, 2020. "Hot Money for a Cold Economy," Working Papers 2020-019, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:88394
    DOI: 10.20955/wp.2020.019
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    References listed on IDEAS

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    3. Jones, Robert A, 1976. "The Origin and Development of Media of Exchange," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 757-775, August.
    4. John Bryant, 2005. "Fiat Money and Coordination: A "Perverse" Coexistence of Private Notes and Fiat Money," Eastern Economic Journal, Eastern Economic Association, vol. 31(3), pages 377-381, Summer.
    5. Nobuhiro Kiyotaki & John Moore, 2002. "Evil Is the Root of All Money," American Economic Review, American Economic Association, vol. 92(2), pages 62-66, May.
    6. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
    7. Farmer Roger E. A. & Guo Jang-Ting, 1994. "Real Business Cycles and the Animal Spirits Hypothesis," Journal of Economic Theory, Elsevier, vol. 63(1), pages 42-72, June.
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    Cited by:

    1. Francesca Carapella & Jin-Wook Chang & Sebastian Infante & Melissa Leistra & Arazi Lubis & Alexandros Vardoulakis, 2024. "Financial Stability Implications of CBDC," Finance and Economics Discussion Series 2024-021, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    Keywords

    Money; hoarding; depression; sunspot equilibria;
    All these keywords.

    JEL classification:

    • B1 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925
    • B2 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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