The Optimum Quantity of Money Revisited

From page 501 -- 'The accepted wisdom on the optimum quantity of money was first expressed by Friedman (1953, 1969): Real money balances represent a service to the economy provided by the government at no cost. The government should maximize the quantity of real balances it provides, since it is costless to do so. It can do this either by means of a deflationary monetary policy or by paying interest on nominal balances. Either policy reduces the cost of holding idle balances and increases the value of the money stock. Hahn (1971, 1973) has objected to Friedman's analysis because it is not grounded in a fully specified model of an economy with money: ... In this paper we study efficiency of monetary policies in an economy in which money plays an essential role.