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The Variability of Velocity in Cash-In-Advance Models

  • Robert J. Hodrick
  • Narayana Kocherlakota
  • Deborah Lucas

Early cash-in-advance models have the feature that the cash-in-advance constraint always binds, implying that the velocity of money is constant. Lucas (1984) and Svensson (1985) propose a change in information structure that potentially allows velocity to vary. By calibrating a version of these models using a new solution algorithm, and using U.S. time series data on consumption growth and money growth, we find that in practice the cash-in-advance constraint almost always binds. This result is robust to changes in the forcing process, the inclusion of credit goods along with cash goods, various preference specifications, and changes in the precision of the agents' information. We conclude that there is little practical gain in using these more complicated informational specifications in future applications of a cash-in-advance technology.

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File URL: http://www.nber.org/papers/w2891.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2891.

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Date of creation: Mar 1989
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Publication status: published as Journal of Political Economy, Vol 99, No. 2, Chicago: University of Chicago Press, April 1991, pp.358-384.
Handle: RePEc:nbr:nberwo:2891
Note: ME
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  1. Backus, David K. & Gregory, Allan W. & Zin, Stanley E., 1989. "Risk premiums in the term structure : Evidence from artificial economies," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 371-399, November.
  2. Finn, M.G. & Hoffman, D.L. & Schlagenhauf, D.E., 1988. "Intertemporal Asset-Pricing Relationships In Barter And Monetary Economies: An Empirical Analysis," UWO Department of Economics Working Papers 8805, University of Western Ontario, Department of Economics.
  3. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  4. 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 919-44, October.
  5. Hodrick, Robert J., 1989. "Risk, uncertainty, and exchange rates," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 433-459, May.
  6. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  7. Kocherlakota, Narayana R., 1990. "On the 'discount' factor in growth economies," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 43-47, January.
  8. Hartley, Peter R, 1988. "The Liquidity Services of Money," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(1), pages 1-24, February.
  9. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
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