The Variability of Velocity in Cash-in-Advance Models

Abstract

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.