Two Monetary Models with Alternating Markets

SAFE Working Paper No. 33

28 Pages Posted: 15 Oct 2013 Last revised: 4 Nov 2013

See all articles by Gabriele Camera

Gabriele Camera

Chapman University - Economic Science Institute; University of Bologna - Dept. of Economics

YiLi Chien

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Multiple version iconThere are 2 versions of this paper

Date Written: October 28, 2013

Abstract

We present a thought-provoking study of two monetary models: the cash-in-advance and the Lagos and Wright (2005) models. We report that the different approach to modeling money — reduced-form vs. explicit role — neither induces theoretical nor quantitative differences in results. Given conformity of preferences, technologies and shocks, both models reduce to one difference equation. The equations do not coincide only if price distortions are differentially imposed across models. To illustrate, when cash prices are equally distorted in both models equally large welfare costs of inflation are obtained in each model. Our insight is that if results differ, then this is due to differential assumptions about the pricing mechanism that governs cash transactions, not the explicit microfoundation of money.

Keywords: cash-in-advance, matching, microfoundations, money, inflation

JEL Classification: E1, E4, E5

Suggested Citation

Camera, Gabriele and Chien, YiLi, Two Monetary Models with Alternating Markets (October 28, 2013). SAFE Working Paper No. 33. Available at SSRN: https://ssrn.com/abstract=2340393 or http://dx.doi.org/10.2139/ssrn.2340393

Gabriele Camera (Contact Author)

Chapman University - Economic Science Institute ( email )

Orange, CA 92866
United States

HOME PAGE: http://www1.chapman.edu/~camera/

University of Bologna - Dept. of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy

YiLi Chien

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

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