Part VI Classical monetary economics and search Chapter 24 Fiscal-Monetary Theories of Inflation . The issues This chapter introduces some issues in monetary theory that mostly revolve around coordinating monetary and fiscal policies. We start from the observation that complete markets models have no role for inconvertible currency | Part VI Classical monetary economics and search Chapter 24 Fiscal-Monetary Theories of Inflation . The issues This chapter introduces some issues in monetary theory that mostly revolve around coordinating monetary and fiscal policies. We start from the observation that complete markets models have no role for inconvertible currency and therefore assign zero value to We describe one way to alter a complete markets economy so that a positive value is assigned to an inconvertible currency we impose a transaction technology with shopping time and real money balances as We use the model to illustrate ten doctrines in monetary economics. Most of these doctrines transcend many of the details of the model. The important thing about the transactions technology is that it makes demand for currency a decreasing function of the rate of return on currency. 1 In complete markets models money holdings would only serve as a store of value. The following transversality condition would hold in a nonstochastic economy T - 1 lim T œ 1 mT 1 PT 0. The real return on money pt pt 1 would have to equal the return Rt on other assets which substituted into the transversality condition yields T-1 lim n Pt 1 mi 1 lim m 1 0. T t o Pt PT t P0 That is an inconvertible money . one for which limy -x_ mT 1 0 must be valueless p0 to . 2 See Bennett McCallum 1983 for an early shopping time specification. - 852 - A shopping time monetary economy 853 Our monetary doctrines mainly emerge from manipulating that demand function and the government s intertemporal budget constraint under alternative assumptions about government monetary and fiscal After describing our ten doctrines we use the model to analyze two important issues the validity of Friedman s rule in the presence of distorting taxation and its sustainability in the face of a time consistency problem. Here we use the methods for solving an optimal taxation problem with commitment in chapter 15 and for characterizing
