INFLATION AND PATTERN OF TRADE IN A DYNAMIC SPECIFIC-FACTORS MODEL WITH MONEY

Shi-Feng Chuang, Teh-Ming Huo and Po-Sheng Lin

Macroeconomic Dynamics, 2005, vol. 9, issue 3, 358-371

Abstract: This paper presents a dynamic specific-factors model with money introduced through a cash-in-advance constraint. Two types of consumption goods are produced, and three types of factors—labor, capital, and land—are used. The cash-in-advance constraint is imposed on different sets of goods. When the constraint is imposed exclusive of the investment, inflation affects the pattern (and volume) of trade through a commodity-substitution effect. When the constraint is imposed inclusive of the investment, inflation may affect the pattern of trade through both the commodity-substitution effect and the factor-supply effect. In each case, we examine and prove the dynamic stability property of the steady-state equilibrium.

Date: 2005
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