THE OPTIMAL TAXATION OF FIAT MONEY IN SEARCH EQUILIBRIUM

This paper investigates the link between welfare and the taxation of m oney in the context of a general equilibrium search model where decent ralized trading motivates the use of fiat money. Since buyers with mon ey must invest effort or search intensity to contact sellers with good s, a natural trading externality arises. Given a sufficiently producti ve economy, search efforts will be too low relative to social efficien cy. This provides a welfare improving role for policies which tax mone y balances. The nature of this role is explored and its implications f or optimal monetary policy discussed.