Econometrica: May, 1987, Volume 55, Issue 3

Money and Interest in a Cash-in-Advance Economy

https://doi.org/0012-9682(198705)55:3<491:MAIIAC>2.0.CO;2-#
p. 491-513

Nancy L. Stokey, Robert E. Lucas, Jr.

In this paper we analyze an aggregate general equilibrium model in which the use of money is motivated by a cash-in-advance constraint, applied to purchases of a subset of consumption goods. The system is subject to both real and monetary shocks, which are economy-wide and observed by all. We develop methods for verifying the existence of, characterizing, and explicitly calculating equilibria.