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
Date Written: January 2004
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: Suggested Citation