The Optimum Quantity of Money in a Stochastic Economy.

Individuals in a monetary economy face both economy-wide and individual-specific risks. Milton Friedman's (1969) assertion that the price level should fall at the rate of time preference must be modified when such risks are present. Truman Bewley's (1983) conjecture that the modified deflation should proceed at a rate greater than the rate of time preference is demonstrated to be true in special cases, but false in general. Moreover, the indeterminacy of equilibrium Bewley found is eliminated by the inclusion of a transactions demand for money. Copyright 1989 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.