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Two Monetary Models with Alternating Markets

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  • GABRIELE CAMERA
  • YILI CHIEN

Abstract

We present a thought‐provoking study of two monetary models: the cash‐in‐advance and the Lagos and Wright ( ) models. The different approaches to modeling money—reduced form versus explicit role—induce neither fundamental theoretical nor quantitative differences in results. Given conformity of preferences, technologies, and shocks, both models reduce to equilibrium difference equations that coincide unless price distortions are differentially imposed on cash prices, across models. Equal distortions support equally large welfare costs of inflation. Performance differences stem from unequal assumptions about the pricing mechanism that governs cash transactions, not the differential modeling of the monetary exchange process.

Suggested Citation

  • Gabriele Camera & Yili Chien, 2016. "Two Monetary Models with Alternating Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(5), pages 1051-1064, August.
  • Handle: RePEc:wly:jmoncb:v:48:y:2016:i:5:p:1051-1064
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    File URL: http://hdl.handle.net/10.1111/jmcb.12326
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    References listed on IDEAS

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    1. Jordi Galí & Mark Gertler, 2007. "Macroeconomic Modeling for Monetary Policy Evaluation," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 25-46, Fall.
    2. Boel, Paola & Camera, Gabriele, 2009. "Financial sophistication and the distribution of the welfare cost of inflation," Journal of Monetary Economics, Elsevier, vol. 56(7), pages 968-978, October.
    3. Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 271-291, March.
    4. 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.
    5. Lagos, Ricardo & Wright, Randall, 2003. "Dynamics, cycles, and sunspot equilibria in 'genuinely dynamic, fundamentally disaggregative' models of money," Journal of Economic Theory, Elsevier, vol. 109(2), pages 156-171, April.
    6. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
    7. Lucas, Robert Jr., 1986. "Principles of fiscal and monetary policy," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 117-134, January.
    8. Berentsen, Aleksander & Camera, Gabriele & Waller, Christopher, 2007. "Money, credit and banking," Journal of Economic Theory, Elsevier, vol. 135(1), pages 171-195, July.
    9. Chiu, Jonathan & Molico, Miguel, 2010. "Liquidity, redistribution, and the welfare cost of inflation," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 428-438, May.
    10. Boel, Paola & Camera, Gabriele, 2011. "The Welfare Cost Of Inflation In Oecd Countries," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S2), pages 217-251, September.
    11. 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, May.
    12. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-220, April.
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    Cited by:

    1. Homburg, Stefan, 2017. "A Study in Monetary Macroeconomics," OUP Catalogue, Oxford University Press, number 9780198807537.

    More about this item

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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