On "rusting" money: Silvio Gesell's Schwundgeld reconsidered

Silvio Gesell hypothesized that money depreciation is economically and socially beneficial, ideas that have often been contended. Here I analyze that in a Sidrauski model in which households additionally have a "love of wealth"-motive. It is shown Gesell's claims may be valid in a demand-determined, short-run equilibrium and why money depreciation overcomes the zero lower bound on nominal interest rates. However, for a typical long-run equilibrium introducing money depreciation in isolation may be bad. But money depreciation, when coupled with expansionary monetary policy, is a necessary condition for a positive Mundell-Tobin effect on long-run real variables and so creates wealth in the model. It is found that this also holds in the transition to the long-run equilibrium. Hence, the spirit of Gesell's hypotheses can be verified for a plausible, long-run environment.