Real taxation and production in a monetary economy with spatially differentiated agents

The impact of money supply on real variables and on utility is an important question in monetary economics. Most previous work studies this impact in representative agent economies, often under perfect foresight. Within such a framework, however, the use of fiat money as a medium of exchange cannot be endogenously explained. This paper, by contrast, considers an economy where fiat money is intrinsically necessary for exchange, due to the local structure of interaction among agents. It investigates the transitory and permanent impact of local or global injections of money on the dynamics of produced quantities and exchanged quantities, prices, and individual welfare, and the mechanisms that explain this evolution. Furthermore, it examines the impact of real taxation on the above-mentioned variables.