The Optimal Taxation of Fiat Money in Search Equilibrium

Abstract

This paper investigates the link between welfare and the taxation of money in the context of a general equilibrium search model where decentralized trading motivates the use of fiat money. Since buyers with money must invest effort or search intensity to contact sellers with goods, a natural trading externality arises. Given a sufficiently productive economy, search efforts will be too low relative to social efficiency. This provides a welfare improving role for policies which tax money balances. The nature of this role is explored and its implications for optimal monetary policy discussed. Copyright 1995 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.