CASH-IN-ADVANCE CONSTRAINTS, BUBBLES, AND MONETARY POLICY

Philippe Michel and Bertrand Wigniolle

Macroeconomic Dynamics, 2005, vol. 9, issue 1, 28-56

Abstract: In this paper, we study the equilibrium dynamics of an overlapping generations model with capital, money, and cash-in-advance constraints. At each period, the economy can experience two different regimes: Either the cash-in-advance constraint is binding and money is a dominated asset, or the constraint is strictly satisfied and money has the same return as capital. When the second regime occurs, we say that the economy experiences a temporary bubble. We show the existence of temporary bubbles, and we prove that cyclical equilibria may exist. In these equilibria, the economy experiences some periods without bubbles and some periods with bubbles. We also show that monetary creation can be used to eliminate temporary bubbles.

Date: 2005
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Working Paper: Cash-in-advance constraints, bubbles and monetary policy (2005)
Working Paper: Cash-in-advance constraints, bubbles and monetary policy (2005)
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