Specialization, Transactions Technologies, and Money Growth
With some models of money and a representative-agent there is no reason for monetary trade because identical individuals can consume their own production. Lucas proposed a parable involving differentiated products in a cash-in-advance model to avoid this problem. This paper studies Lucas?s suggestion by developing a differentiated product model with money, a cash-in-advance constraint for market purchases, and endogenous specialization. Individuals who are identical ex ante choose to differ ex post in equilibrium. Monetary exchange involves differentiated goods at a point in time, so a nonzero balance of trade is not a prerequisite for a monetary equilibrium. In contrast to results in some other models, we find that consumption of goods that are not purchased with money (analogous to leisure services or credit goods) can either rise or fall with a rise in the money growth rate. Finally, we allow for costly barter and examine individuals' choices of the method of payment. We discuss the implied nominal-interest elasticities of the (real) demand for money in the general equilibrium.
|Date of creation:||Sep 1988|
|Publication status:||published as International Economic Review, 33 no. 2, May 1992, 283-298|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
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- Abel, Andrew B., 1985.
"Dynamic behavior of capital accumulation in a cash-in-advance model,"
Journal of Monetary Economics,
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- Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- King, Robert G. & Plosser, Charles I., 1986. "Money as the mechanism of exchange," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 93-115, January.
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- Svensson, Lars E O, 1985. "Money and Asset Prices in a Cash-in-Advance Economy," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 919-944, October.
- Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-220, April. Full references (including those not matched with items on IDEAS)
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