THE OPTIMUM QUANTITY OF MONEY - THEORY AND EVIDENCE

Our model for computing the Ramsey optimal inflation tax includes seve ral models from the previous literature as special cases. The model hi ghlights the various assumptions in that literature that have led to s uch different results, assumptions that relate to the interest and sca le elasticities of money demand and how they vary with the interest ra te, whether money is required to pay taxes, and the nature of transact ions when interest rates are very low. Calibrating the model to a vari ety of empirical studies yields an optimal nominal interest rate of le ss than 1 percent per year, although that finding is sensitive to the calibration.