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Inflation and Output in a Cash Constrained Economy

Author

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  • Jalali-Naini , Ahmad R.

    (Institute for Management and Planning Studies (IMPS)
    Institute for International Energy Studies (IIES)
    Monetary and Banking Research Institute (MBRI), Central Bank of the Islamic Republic of Iran (CBI))

  • Naderian , Mohammad Amin

    (Institute for International Energy Studies (IIES))

Abstract

We examine permanent effects of monetary expansion in an economy where access to credit for financing consumption and investment is limited and consumers and firms are cash-constrained. The main difference between our model with those of Cooley-Hanson (1989) and Walsh (2003) is that investment, in addition to consumption, is subject to a cash-constraint. In this respect, our model is similar to Stockman (1981) and Abel (1985) but different from them in that they do not provide for labor-leisure choice. Moreover, in contrast to Stockman and Abel we follow Svensson's (1985) timing sequence in that the asset market opens after the goods market. A version of Cooley and Hanson model is calibrated with the data on the economy of Iran. We compare the business cycles and output and consumption moments generated from simulated data to the moments extracted from the actual data. From the impulse-response functions we also derive the effect of a positive monetary shock on output and inflation.

Suggested Citation

  • Jalali-Naini , Ahmad R. & Naderian , Mohammad Amin, 2011. "Inflation and Output in a Cash Constrained Economy," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 6(1), pages 1-28, October.
    • Handle: RePEc:mbr:jmonec:v:6:y:2011:i:1:p:1-28
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    References listed on IDEAS

    as
    1. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-748, September.
    2. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
    3. Fischer, Stanley, 1979. "Capital Accumulation on the Transition Path in a Monetary Optimizing Model," Econometrica, Econometric Society, vol. 47(6), pages 1433-1439, November.
    4. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    5. Bruno, Michael & Easterly, William, 1998. "Inflation crises and long-run growth," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 3-26, February.
    6. Michael Sarel, 1996. "Nonlinear Effects of Inflation on Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 199-215, March.
    7. William J. Baumol, 1952. "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 66(4), pages 545-556.
    8. Abel, Andrew B., 1985. "Dynamic behavior of capital accumulation in a cash-in-advance model," Journal of Monetary Economics, Elsevier, vol. 16(1), pages 55-71, July.
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    Cited by:

    1. Jalali-Naini , Ahmad R. & Naderian , Mohammad A., 2012. "Central Bank Lending, Inflation and Output Dynamics in a Limited Participation Model," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 7(1), pages 41-66, October.

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    More about this item

    Keywords

    Inflation; Output; Growth;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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