Money as a Store of Value: Nominal Assets and Real Interest Rates

The paper offers a new formulation of the old hypothesis that money exists due to shortage of other financial assets. The theory admits various monetary regimes, ranging from a strict gold standard to interest-bearing fiat money in the form of nominal government bonds. A central assumption is that claims on currently non-existing real assets, which will be productive in the future, are not tradable today. Due to the resulting scarcity of saving instruments, money serves as a useful store of value. Although all prices are flexible and all assets are liquid, monetary and fiscal authorities have considerable control over the long-run real interest rate and hence over real investment and output. Money tends to be particularly valuable when either the rate of growth is low or the turnover of tradable productive assets is high, and in these regimes optimal monetary policy is relatively loose.