TY  - JOUR
AU  - Mulligan,Casey B.
AU  - Sala-i-Martin,Xavier X.
TI  - The Optimum Quantity of Money: Theory and Evidence
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5954
PY  - 1997
Y2  - March 1997
UR  - http://www.nber.org/papers/w5954
L1  - http://www.nber.org/papers/w5954.pdf
N1  - Author contact info:
Casey B. Mulligan
University of Chicago
Department of Economics
1126 East 59th Street
Chicago, IL  60637
Tel: 773/702-9017
Fax: 773/702-8490
E-Mail: c-mulligan@uchicago.edu

Xavier Sala-i-Martin
Department of Economics
Columbia University
420 West 118th Street, 1005
New York, NY 10027
Tel: 212/854-7055
Fax: 212/854-8059
E-Mail: xs23@columbia.edu
AB  - In this paper we propose a simple and general model for computing the Ramsey optimal inflation tax, which includes several models from the previous literature as special cases.  We show that it cannot be claimed that the Friedman rule is always optimal (or always non-optimal) on theoretical grounds. The Friedman rule is optimal or not, depending on conditions related to the shape of various relevant functions.  One contribution of this paper is to relate these conditions to measurable variables such as the interest rate or the consumption elasticity of money demand.  We find that it tends to be optimal to tax money when there are economies of scale in the demand for money (the scale elasticity is smaller than one) and/or when money is required for the payment of consumption or wage taxes.  We find that it tends to be optimal to tax money more heavily when the interest elasticity of money demand is small.  We present empirical evidence on the parameters that determine the optimal inflation tax.  Calibrating the model to a variety of empirical studies yields an optimal nominal interest rate of less than 1% per year, although that finding is sensitive to the calibration.
ER  -