Delete comment from: Economic Logic
I am happy to have our paper discussed in this blog. But I think there are two misunderstandings.
First, with respect to the search literature.
To make the point, let me first cite the author of this economiclogig blog (sorry, I feel very uncomfortable that I cannot call the author by his name!) in his recent blog 'The best solution: carbon taxes':
"When there is some externality, the best way to deal it is with a tax (for a negative externality like pollution) or a subsidy (for a positive externality like education). Yet, I am continuously amazed how this policy using the market mechanism has found little reception in the United States. And economists are also very fond of it..."
The early search literature found that in sufficiently productive economies a search-externality might arise, and it proposed a 'tax on non-search', i.e. a tax on hoarding money to overcome this externality. Seems that the blogger is also one of the economists that are 'not very fond of it' - or he just didn't read our paper well.
All this has nothing to do with the real vs. nominal value of money but with a 'hot potato'-effect of Gesell taxes that are similar to the one of inflation.
The blogger is right: in the early search literature this tax has mainly been seen as a proxy for inflation since technical reasons made the analysis of inflation in these models impossible. But in latest generation models you can study both: inflation and Gesell taxes and both can have 'hot potato' effects and overcome the search-externality. Our paper thus closes the gap between these literatures: 'taxes on money' to improve efficiency and 'Gesell taxes' as policy instrument to get negative nominal interest rates.
This does not mean that the authors of the early search-literature would endorse a Gesell tax, but that such a tax has a theoretical fundament in its role to overcome an externality.
Second, with respect to the role of inflation: As stated above, inflation can have similar effects on velocity but in contrast to a Gesell tax it increases the price level and distorts the price system and the wealth of debtors vs. creditors... In contrast, you can run a zero inflation regime and have a similar "hot potato" effect with Gesell taxes and avoid thereby the distortions of inflation.
So, I wouldn't agree that our paper neglects the influence of inflation on hoarding etc. We argue that it is not a perfect substitute for a Gesell tax (especially if you cannot generate inflation or inflation expectations in a liquidity trap at the zero lower bound).
Finally, the Buiter proposal of Eichner's scheme is discussed for sake of completeness. I agree that money in the utility function arguments are silly, and therefore I work with search-theoretic micro-foundations.
The reader of our article may judge whether it deserves the label 'bad research' or whether this label better suits this (anonymous!) blog.
MMenner
Dec 19, 2011, 10:32:15 PM