Real Indeterminacy in a Cash-In-Advance Economy
This paper studies the dynamic properties of a highly stylized monetary economy in which an infinitely-lived representative household can transfer wealth from one period to another relying on money and is cash-constrained on the good market. We show that a low intertemporal substitution resulting from preferences can generate real indeterminacy. This result is illustrated by four showcases: isoelastic utility function, minimum consumption, internal habit and external habit. We further show that real indeterminacy is not sufficient per se to obtain an empirically relevant representation of the effects of monetary policy. The form of the beliefs matters.
KeywordsMonetary Policy Inflation Rate Market Imperfection Money Growth Minimum Consumption
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