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Modeling monetary economies: an equivalence result

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  • Gabriele Camera
  • YiLi Chien

Abstract

This paper offers a methodological contribution to monetary theory. First, it presents a model economy with cash-in-advance constraints, following the work of Lucas in the early 80’s; then, it specializes the model to preferences and shocks assumed in the Lagos and Wright (2005) framework. Second, it derives the main equations describing allocations under competitive pricing and demonstrates that the two models—which on the surface appear different—are mathematically equivalent. Such equivalence result is extended to stationary equilibrium under non-competitive pricing; in both models, allocations depend on a free parameter controlling price markups.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2013-009.

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Date of creation: 2013
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Handle: RePEc:fip:fedlwp:2013-009

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Keywords: Monetary theory ; Money ; Inflation (Finance);

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  1. Berentsen, Aleksander & Camera, Gabriele & Waller, Christopher, 2007. "Money, credit and banking," Journal of Economic Theory, Elsevier, vol. 135(1), pages 171-195, July.
  2. Paola Boel & Gabriele Camera, 2009. "Financial Sophistication and the Distribution of the Welfare Cost of Inflation," Purdue University Economics Working Papers 1222, Purdue University, Department of Economics.
  3. Jonathan Chiu & Miguel Molico, 2007. "Liquidity, Redistribution, and the Welfare Cost of Inflation," Working Papers 07-39, Bank of Canada.
  4. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
  5. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
  6. Lucas, Robert Jr., 1986. "Principles of fiscal and monetary policy," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 117-134, January.
  7. Ping He & Lixin Huang & Randall Wright, 2005. "Money And Banking In Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 637-670, 05.
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