A Theory of Money, Prices, and the Rate of Interest. Part III. The Rate of Interest on Fiat Money in a Closed Economy.

Martin Shubik

Expert InsightsPublished 1971

In a well-controlled, competitive monetary economy with no uncertainty, there are no idle cash balances--they are needed for current transactions or are loaned. The presence of uncertainty calls for the holding of cash. In a trading economy with perfect foresight, without taxes, but with traders having positive time discounts, the rate of interest on paper money is positive. With uncertainty, fiat money is a form of insurance or generalized futures contract. The mathematical differences among static general equilibrium theory, a theory of money in a static general equilibrium context with perfect foresight, and an evolutionary system are essentially those among maximization subject to equalities: convex programming and dynamic programming. Inflation or deflation are consistent with an equilibrium distribution of real resources and the appropriate rate of interest, taxation, and money-issue policy. 60 pp. Ref. (See also P-4686, P-4699.) (Author)

Document Details

Citation

Chicago Manual of Style

Shubik, Martin, A Theory of Money, Prices, and the Rate of Interest. Part III. The Rate of Interest on Fiat Money in a Closed Economy. Santa Monica, CA: RAND Corporation, 1971. https://www.rand.org/pubs/papers/P4723.html.
BibTeX RIS

This publication is part of the RAND paper series. The paper series was a product of RAND from 1948 to 2003 that captured speeches, memorials, and derivative research, usually prepared on authors' own time and meant to be the scholarly or scientific contribution of individual authors to their professional fields. Papers were less formal than reports and did not require rigorous peer review.

This document and trademark(s) contained herein are protected by law. This representation of RAND intellectual property is provided for noncommercial use only. Unauthorized posting of this publication online is prohibited; linking directly to this product page is encouraged. Permission is required from RAND to reproduce, or reuse in another form, any of its research documents for commercial purposes. For information on reprint and reuse permissions, please visit www.rand.org/pubs/permissions.

RAND is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND's publications do not necessarily reflect the opinions of its research clients and sponsors.