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THE CASH-IN-ADVANCE CONSTRAINT IN MONETARY GROWTH MODELS WITH LABOR MARKET SEARCH

Published online by Cambridge University Press:  30 July 2013

Burkhard Heer  and
Alfred Maußner
Burkhard Heer*
Affiliation:
University of Augsburg and CESifo
Alfred Maußner
Affiliation:
University of Augsburg
*
Address correspondence to: Burkhard Heer, Department of Economics, University of Augsburg, Universitätsstraße 16, 86159 Augsburg, Germany; e-mail: Burkhard.Heer@wiwi.uni-augsburg.de.
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Abstract

We study the sensitivity of the inflation–growth trade-off in monetary growth models to the introduction of search frictions in the labor market. We consider three types of endogenous growth models: (1) the AK model, (2) the Lucas supply-side model, and (3) the two-sector model of Jones and Manuelli. We show that the effects depend on the specification of the cash-in-advance constraint and the magnitude of the semi-interest elasticity of the income velocity. For the AK model, economic growth increases with higher inflation. For the other two models, growth declines for the case of the standard cash-in-advance constraint on consumption, whereas it either increases or decreases if money is introduced, as in the cash–credit good economy of Dotsey and Ireland, depending on the semi-interest elasticity of the income velocity. The welfare effects of inflation are shown to be economically significant in the presence of search unemployment.

Keywords

InflationGrowthCostly CreditSearch Unemployment
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Issue 1 , January 2015 , pp. 144 - 166
Copyright
Copyright © Cambridge University Press 2013 

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