Money with idiosyncratic uninsurable returns to capital (Q1841180)

This paper deals with the optimum quantity of money. The author considers the case where the individuals own capital instead of a stream of endownment, which gives the conceptual possibility to avoid lump-sum tax. The economy is modeled by a continuum of individuals. Each period, they allocate their wealth into consumption, capital, and money such that the investment is irreversible and the return to capital is stochastic. The optimal policy is obtained by dynamic programming methods and the equilibrium is discussed. The author concludes, that the return to money cannot be equated to the social return to capital since to be efficient, public capital must be able to earn the social return to capital, meaning that the government can manage the capital as efficiently as private individuals.