Document Type
Discussion Paper
Publication Date
4-1-1972
CFDP Number
338
CFDP Pages
54
Abstract
In a well controlled monetary economy with no uncertainty and a money market, money is not merely a veil, it is a cocoon. There are no idle cash balances in a competitive monetary economy with a money market without uncertainty. The presence of uncertainty calls for the holding of cash. In a trading economy with perfect foresight, without taxes, but with traders having positive time discounts the rate of interest on paper money is positive. With uncertainty, fiat money is a form of insurance or generalized futures contract. The mathematical differences among static general equilibrium theory, a theory of money in a static general equilibrium context with perfect foresight and an evolutionary system are essentially the differences among maximization subject to equalities; convex programming and dynamic programming. They are needed for current transactions or are loaned.
Recommended Citation
Shubik, Martin, "A Theory of Money and Financial Institutions. Part V. The Rate of Interest on Fiat Money in a Closed Economy" (1972). Cowles Foundation Discussion Papers. 571.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/571