Modeling monetary economies: an equivalence result

Gabriele Camera and YiLi Chien

No 2013-009, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We present a thought-provoking study of two monetary models: the cash-in-advance and the Lagos and Wright (2005) models. The different approaches to modeling money?reduced-form vs. explicit role?neither induce fundamental theoretical nor quantitative differences in results. Given conformity of preferences, technologies and shocks, both models reduce to equilibrium difference equations that coincide unless price distortions are differentially imposed on cash prices, across models. Equal distortions support equally large welfare costs of inflation. Performance differences stem from unequal assumptions about the pricing mechanism that governs cash transactions, not the differential modeling of the monetary exchange process.

Keywords: Monetary theory; Money; Inflation (Finance) (search for similar items in EconPapers)
Pages: 18 pages
Date: 2013
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:2013-009

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DOI: 10.20955/wp.2013.009

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