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Cash-In-Advance Constraints, Bubbles, And Monetary Policy

  • MICHEL, PHILIPPE
  • WIGNIOLLE, BERTRAND

In this paper, we study the equilibrium dynamics of an overlapping generations model with capital, money and cash-in-advance constraints. At each period, the economy can experience two different regimes: either the cash-inadvance constraint is binding and money is a dominated asset, or the constraint is strictly satisfied and money has the same return as capital. When the second regime occurs, we say that the economy experiences a temporary bubble. We show the existence of temporary bubbles, and we prove that cyclical equilibria may exist. In these equilibria, the economy experiences some periods without bubbles and some periods with bubbles. We also show that monetary creation can be used in order to eliminate temporary bubbles.

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Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 9 (2005)
Issue (Month): 01 (February)
Pages: 28-56

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Handle: RePEc:cup:macdyn:v:9:y:2005:i:01:p:28-56_04
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  1. Huybens, Elisabeth & Smith, Bruce D., 1998. "Financial Market Frictions, Monetary Policy, and Capital Accumulation in a Small Open Economy," Journal of Economic Theory, Elsevier, vol. 81(2), pages 353-400, August.
  2. Stacey L. Schreft & Bruce D. Smith, 1995. "The effects of open market operations in a model of intermediation and growth," Working Papers 562, Federal Reserve Bank of Minneapolis.
  3. Michel, Philippe & Wigniolle, Bertrand, 2003. "Temporary bubbles," Journal of Economic Theory, Elsevier, vol. 112(1), pages 173-183, September.
  4. Frank Hahn & Robert Solow, 1997. "A Critical Essay on Modern Macroeconomic Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 026258154x, June.
  5. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  6. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  7. Bruce D. Smith & John H. Boyd, 1998. "Capital market imperfections in a monetary growth model," Economic Theory, Springer, vol. 11(2), pages 241-273.
  8. Pere Gomis-Porqueras, 2000. "Money, banks and endogenous volatility," Economic Theory, Springer, vol. 15(3), pages 735-745.
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