Money and Interest in Cash-In-Advance Economy

Abstract

In this paper we analyze an aggregative general equilibriiri 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 nxnetary 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.