Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/77538
Authors: 
Clausen, Andrew
Strub, Carlo
Year of Publication: 
2010
Series/Report no.: 
Working Paper Series, Department of Economics, University of Zurich 8
Abstract: 
Classical models of money are typically based on a competitive market without capital or credit. They then impose exogenous timing structures, market participation constraints, or cash-in-advance constraints to make money essential. We present a simple model without credit where money arises from a fixed cost of production. This leads to a rich equilibrium structure. Agents avoid the fixed cost by taking vacations and the trade between workers and vacationers is supported by money. We show that agents acquire and spend money in cycles of finite length. Throughout such a money cycle, agents decrease their consumption which we interpret as the hot potato effect of inflation. We give an example where money holdings do not decrease monotonically throughout the money cycle. Optimal monetary policy is given by the Friedman rule, which supports efficient equilibria. Thus, monetary policy provides an alternative to lotteries for smoothing out non-convexities.
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size
133.61 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.