The Cash-in-Advance Constraint in Monetary Growth Models
45 Pages Posted: 29 Nov 2011
Date Written: November 29, 2011
In most monetary models of economic growth, higher long-run inflation is associated with a decline in the growth rate and employment. We show that this result is sensitive with respect to the specification of the cash-in-advance constraint. We consider three types of endogenous growth models: the AK-model, the Lucas (1990) supply-side model, and the two-sector model of Jones and Manuelli (1995). With the standard cash-in-advance constraint on consumption, higher inflation results in lower growth and employment in all three models, while, in the cash-credit good economy of Dotsey and Ireland (1996), the effect is the exact opposite.
Keywords: inflation, growth, costly credit, search unemployment
JEL Classification: O420
Suggested Citation: Suggested Citation