We study the effects of money (anticipated inflation) on capital formation. Previous papers on this topic adopt reduced …-form approaches, putting money in the utility function or imposing cash in advance, but use otherwise frictionless models. We follow a … literature that is more explicit about the frictions making money essential. This introduces several new elements, including a …

bilateral exchanges for which money is essential. The model is estimated and evaluated based on postwar U.S. data. We document … its money demand properties and determine the optimal long-run inflation rate that trades off the New Keynesian distortion … against the distortion caused by taxing money and hence transactions in the decentralized market. Target rates of -1% or less …