Indeterminacy in a Cash-in-Advance Two-Sector Economy

This paper aims to fill some theoretical gaps existing in literature between monetary indeterminate economies and multisector models. We carry out such a purpose by considering a two-sector infinite horizon economy with a partial cash-in-advance constraint on consumption expenditures. This formulation allows to consider a steady state velocity of money which is strictly greater than one and thus provides a more plausible framework than the standard formulation in which all the consumption purchases are paid cash. We prove that the steady state is bound to be indeterminate when the amplitude of the liquidity constraint is low enough and that a capital intensive investment good or a strongly capital intensive consumption good improve considerably the scope for indeterminacy. As a consequence, we show that without any restriction on the elasticity of intertemporal substitution in consumption, multiple equilibria may occur if the velocity of money is greater than a critical bound which is compatible with empirial estimates.