Working Paper: NBER ID: w1618
Authors: Robert E. Lucas Jr.; Nancy L. Stokey
Abstract: In this paper we analyze an aggregative general equilibrimi model in which the use of money is motivated by a cash-in-advance constraint, applied to purchases of a subset of consumption goods. The system is subject to both real and monetary shocks, which are economy-wide and observed by all. We develop methods for verifying the existence of, characterizing, and explicitly calculating equilibria. A main result of the analysis is that current money growth affects the current real allocation only insofar as it affects expectations about future money growth, i.e., only through its value as a signal.
Keywords: money; interest; cash-in-advance; general equilibrium
JEL Codes: E41; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| current money growth (O42) | expectations regarding future money growth (E41) |
| expectations regarding future money growth (E41) | current real allocations (D51) |
| current money growth (O42) | current real allocations (D51) |
| current money growth (O42) | consumption and investment decisions (E20) |
| shocks to money supply (E59) | real allocations (D61) |
| shocks to money supply (E59) | interest rates (E43) |
| interest rates (E43) | overall economic equilibrium (D59) |