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INDETERMINACY IN CASH-IN-ADVANCE MODELS AND THE ROLE OF FRICTIONS

Published online by Cambridge University Press:  08 December 2009

Koray Akay
Koray Akay*
Affiliation:
Istanbul Bilgi University
*
Address correspondence to: Koray Akay, Department of Economics, Istanbul Bilgi University, Kurtulus Deresi Cad. No. 47, 34440 Dolapdere, Istanbul, Turkey; e-mail: koray@bilgi.edu.tr
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Abstract

A monetary cash-in-advance model is known to be prone to real indeterminacy if the intertemporal elasticity of substitution in consumption is sufficiently low. Moreover, if the model features habit formation in consumption, the scope of indeterminacy increases substantially. This paper shows that many of the nominal frictions and real rigidities commonly used in the New Keynesian paradigm act to decrease the scope of this indeterminacy. These frictions include stickiness in prices and wages, adjustment costs in investment, and variable capacity utilization. When they are all used together in the model, the problem of indeterminacy nearly vanishes, even when habit formation in consumption is allowed.

Keywords

IndeterminacySunspotsHabit FormationCash in Advance
Type
Articles
Information
Macroeconomic Dynamics , Volume 14 , Issue 1 , February 2010 , pp. 119 - 135
Copyright
Copyright © Cambridge University Press 2009

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