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Specialization, Transactions Technologies, and Money Growth

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  • Harold L. Cole
  • Alan C. Stockman

Abstract

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.

Suggested Citation

  • Harold L. Cole & Alan C. Stockman, 1988. "Specialization, Transactions Technologies, and Money Growth," NBER Working Papers 2724, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2724
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    1. Abel, Andrew B., 1985. "Dynamic behavior of capital accumulation in a cash-in-advance model," Journal of Monetary Economics, Elsevier, vol. 16(1), pages 55-71, July.
    2. 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.
    3. 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.
    4. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
    5. Aschauer, David & Greenwood, Jeremy, 1983. "A Further Exploration in the Theory of Exchange Rate Regimes," Journal of Political Economy, University of Chicago Press, vol. 91(5), pages 868-875, October.
    6. 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.
    7. 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. Lacker, Jeffrey M. & Schreft, Stacey L., 1996. "Money and credit as means of payment," Journal of Monetary Economics, Elsevier, vol. 38(1), pages 3-23, August.
    2. Albanesi, Stefania, 2007. "Inflation and inequality," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1088-1114, May.
    3. Tommasi, Mariano, 1999. "On high inflation and the allocation of resources," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 401-421, December.
    4. Barelli, Paulo & Pessôa, Samuel de Abreu, 2003. "A note on Cole and Stockman," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 479, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    5. Eden, Maya & Nguyen, Ha, 2014. "Inflation and indivisible investment in developing economies," Policy Research Working Paper Series 6972, The World Bank.
    6. Hancock, Diana & Humphrey, David B., 1997. "Payment transactions, instruments, and systems: A survey," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1573-1624, December.
    7. Stefania Albanesi & V. V. Chari & Lawrence J. Christiano, 2003. "Expectation Traps and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 715-741.
    8. Erosa, Andres & Ventura, Gustavo, 2002. "On inflation as a regressive consumption tax," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 761-795, May.
    9. Mariano Tommasi, 1996. "High inflation: resource misallocations and growth effects," Estudios de Economia, University of Chile, Department of Economics, vol. 23(2 Year 19), pages 157-177, December.
    10. English, William B., 1999. "Inflation and financial sector size," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 379-400, December.
    11. Dotsey, Michael & Ireland, Peter, 1996. "The welfare cost of inflation in general equilibrium," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 29-47, February.
    12. Lu, Chia-Hui & Chen, Been-Lon & Hsu, Mei, 2011. "The dynamic welfare cost of seignorage tax and consumption tax in a neoclassical growth model with a cash-in-advance constraint," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 247-258, June.
    13. William B. English, 1996. "Inflation and financial sector size," Finance and Economics Discussion Series 96-16, Board of Governors of the Federal Reserve System (U.S.).
    14. Harold L. Cole & Lee E. Ohanian, 1997. "Shrinking money and monetary business cycles," Working Papers 579, Federal Reserve Bank of Minneapolis.
    15. Al-Jarhi, Mabid, 2000. "السياسات النقدية في إطار إسلامي
      [Monetary Policy in an Islamic Framework]
      ," MPRA Paper 67547, University Library of Munich, Germany, revised 2002.
    16. Harold L. Cole & Narayana R. Kocherlakota, 1998. "Zero nominal interest rates: why they're good and how to get them," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 2-10.

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