Williamson_Notes_on_Cash_in_advance英文版本.pdf

Chapter 8 A Cash-In-Advance Model Many macroeconomic approaches to modeling monetary economies pro- ceed at a higher level than in monetary models with search or overlap- ping generations (one might disparagingly refer this higher level of mon- etary model as implicit theorizing). One approach is to simply assume that money directly enters preferences (money-in-the-utility-function models) or the technology (“transactions cost” models). Another ap- proach, which we will study in this chapter, is to simply assume that money accumulated in the previous period is necessary to nance cur- rent period transactions. This cash-in-advance approach was pioneered by Lucas (1980, 1982), and has been widely-used, particularly in quan- titative work (e.g. Cooley and Hansen 1989). 8.1 A Simple Cash-in-Advance Model With Production In its basic structure, this is a static representative agent model, with an added cash-in-advance constraint which can potentially generate dynamics. The representative consumer has preferences given by 0 X [() ( )] (8.1) =0 where 0 1 is consumption, and is labor supply. Assume that (·) is strictly increasing, strictly concave, and twice dierentiable, 105 106 CHAPTER 8. A CASH-IN-ADVANCE MODEL and that (·) is increasing, strictly convex, and twice dierentiable, with 0 0 (0) = 0 and () = where is the endowment of time the consumer receives each period. The representative rm has a constant-returns-to-scale technology, = (8.2)