On the Efficiency of a Monetary Equilibrium.

The purpose of this paper is to study some problems which are related to the recent controversy about the inefficiency of a monetary equilibrium and the so-called" Optimum Quantity of Money". First, we would like to make more precise an argument which is commonly used in the literature when" proving "the inefficiency ora (stationary) monetary equilibrium (see, e.g. R. W. Clower, M. Friedman, H. G. Johnson, P. A. Samuelson). This argument can be paraphrased as follows. "In a stationary monetary equilibrium, traders' marginal utility (or yield) of real balances must be positive if the traders discount the future. On the other hand, it costs nothing to provide an extra unit of real cash balances at the level of the whole society: it suffices to lower the price level slightly. As a result of this discrepancy between marginal utility and marginal cost of real balances, a stationary monetary equilibrium is inefficient when traders discount the future". While this argument is an intuitively appealing shortcut, it seems desirable to make it a bit more precise, for the concept of "marginal utility of real balances" is rather ambiguous. The need for greater precision can be best illustrated by the fact that some writers on the subject have tried to "explain" the gap between the private and social cost of real balances by the existence of hypothetical and ill-defined "externalities" (see, e.g. M. Friedman, H. G. Johnson). Secondly, we would like to study a proposition put forward by M. Friedman and others: when the traders discount the future in the same way, it is possible to induce a (properly chosen) steady decrease of the total money stock by imposing lump sum taxes on traders so that, in the long run, any steady market equilibrium is efficient. In addition, some economists claim that an alternative way to achieve the same result would be to pay a (properly chosen) nominal rate of interest on cash balances (see, e.g., H. G. Johnson, S. C. Kolm). This is the third issue we shall attempt to clarify in this paper. [ABSTRACT FROM AUTHOR]