A theoretical and empirical analysis of the productivity of money

This paper analyzes the theoretical properties which make money a productive asset. Empirical evidence on the productivity of money is provided by examining whether it is valid to include a real money variable as a factor input in an aggregate production function. This is accomplished oy constructing two structural models of the production process based on a Cobb-Douglas production function and a translog production function respectively. These models are empirically estimated to examine the role of money in the production process.

Chapter II presents a theoretical analysis of the characteristics of money which make it a productive asset. An analysis of why these unique characteristics have induced economists to view cash holdings as unproductive is also provided. The general purpose of this chapter is to provide some important insights into the historical development of modern monetary theory.

Chapter III presents a detailed analysis of James Tobin's money growth model. Special attention is given to his interpretation of the role of money in economic growth. It is shown that the controversial implication derived from this model that the long-run equilibrium rate of capital accumulation is lower in a monetary economy than a non-monetary economy depends upon several restrictive assumptions which do not accurately depict the workings of a monetary economy.

After analyzing the Tobin model, arguments are presented which support the hypothesis that factors which encourage individuals to hold cash balances may promote growth in less-developed economies. These arguments suggest that policies which discourage individuals from holding money may deter rather than stimulate economic growth.

In Chapter IV the money growth models developed by David Levhari and Don Patinkin are reconstructed; one which views money as a consumer's good and one which views money as a producer's good. In constructing these models Patinkin and Levhari retain all of the assumptions made by Tobin except they include the inputed services from real money balances in the definition of disposable income when money is viewed as a consumer's good and they introduce a real money variable into the production function when money is viewed as a producer's good. The implications derived from these models are contrasted with the implications derived from Tobin's money growth model.

The question of whether it is valid to include a real money variable as a factor input in an aggregate production function is examined by constructing two structural models based on a Cobb-Douglas and a translog production function respectively. Drawing from profit maximizing conditions and assuming that markets are perfectly competitive three factor demand equations are derived for each of these functional forms. These equations, together with the production functions, form two four equation structural models which are estimated to determine whether it is valid to include a real money variable as a factor input in an aggregate production function.

Chapter V contains a discussion of previous empirical work done on this question along with a discussion of the empirical tests done for this study. The econometric testing consists of using one- and two-stage least squares on annual time series data. The data cover the period 1929-1967 for the private domestic sector of the United States economy. A technical discussion of the econometric techniques used to estimate the Cobb-Douglas and translog models are included in the Appendix to Chapter V. The results from both models indicate that real money
Are positive and significantly related to real output over this period. Hence they suggest that it is valid to include a real money variable as a factor input in an aggregate production function. In Chapter VI conclusions and implications are presented.

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