The Optimal Price of Money

Abstract

The optimal inflation tax is computed in monetary models where money is costly to supply. The models are simple general equilibrium models with money in the utility function or a transactions technology. The inflation tax is a means of raising taxes to finance exogenous government expenditures. The alternative means of revenue are also distortionary. The main point of the article is to show that the robustenss of the optimality of the Friedman rule, of a zero nominal interest rate, resides in the assumption that money is produced at zero cost.

Keywords: Friedman rule, Inflation tax, Optimum Quantity of money

JEL Classification: E31, E41, E58, E62