Money cycles

Andrew Clausen, Carlo Strub

Research output: Working paperDiscussion paper

Abstract

Operating overheads are widespread and lead to concentrated bursts of activity. To transfer resources between active and idle spells, agents demand financial assets. Futures contracts and lotteries are unsuitable, as they have substantial overheads of their own. We show that money – under efficient monetary policy – is a liquid asset that leads to efficient allocations. Under all other policies, agents follow inefficient “money cycle” patterns of saving, activity, and inactivity. Agents spend their money too quickly – a “hot potato effect of inflation”. We show that inflation can stimulate inefficiently high aggregate output.
Original languageEnglish
PublisherEdinburgh School of Economics Discussion Paper Series
Number of pages26
Publication statusPublished - 10 Sep 2014

Publication series

NameESE Discussion Papers
No.249

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