A Theory of Money and Financial Institutions. Part V. The Rate of Interest on Fiat Money in a Closed Economy


Martin Shubik

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Discussion Paper

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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.

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