Monetary Theory of Inflation and the LBD in Transactions Technology

Trinity College - Department of Economics Working Paper No. 2004/1

41 Pages Posted: 11 Mar 2008

See all articles by Constantin Gurdgiev

Constantin Gurdgiev

Trinity College, Dublin; Middlebury Institute of International Studies at Monterey (MIIS)

Date Written: January 2004

Abstract

Classical models of inflation, utilising the transactions-based demand for money, predict that monetary policy will be ineffective in changing real variables. In response to this, the New Keynesian sticky-price models assume price-rigidity in order to address the possibility for the existence of real effects of monetary policy. At the same time, both major theories have difficulty in explaining persistency in the money demand of households in the absence of uncertainty. We develop a flexible price model with endogenous transactions-costs driven demand for money that captures the possibility for real effects of monetary policy and accounts for the persistency of money demand. In our model, persistency is derived from transactions technology that assumes the existence of learning-by-doing effects in shopping costs. We proceed to compare the model with the standard monetary model of inflation.

Keywords: Inflation, Money Demand, Learning-by-Doing, Transactions Technology, Seigniorage

JEL Classification: E31, E41, E51

Suggested Citation

Gurdgiev, Constantin, Monetary Theory of Inflation and the LBD in Transactions Technology (January 2004). Trinity College - Department of Economics Working Paper No. 2004/1. Available at SSRN: https://ssrn.com/abstract=1105025 or http://dx.doi.org/10.2139/ssrn.1105025

Constantin Gurdgiev (Contact Author)

Trinity College, Dublin ( email )

Trinity College
Dublin 2

Middlebury Institute of International Studies at Monterey (MIIS) ( email )

460 Pierce St
Monterey, CA 93940
United States

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