A Monetary Equilibrium Model with Transactions Costs

This paper presents the competitive equilibrium of an economy in which people hold money for transactions purposes. It studies both the steady states that result from different rates of monetary expansion and the effects of such non-steady-state events as an open-market operation. Even though the model features no uncertainty and perfect foresight, open-market operations affect aggregate output. In particular, a simultaneous increase in money and governmental holdings of capital temporarily raises aggregate capital and output while it lowers the real rate of interest on capital.