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Multiple equilibria in a cash‐in‐advance two‐sector economy
Author(s) -
Bosi Stefano,
Magris Francesco,
Venditti Alain
Publication year - 2005
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/j.1742-7363.2005.00009.x
Subject(s) - economics , liquidity constraint , consumption (sociology) , indeterminacy (philosophy) , constraint (computer aided design) , cash , investment (military) , microeconomics , elasticity of intertemporal substitution , monetary economics , capital (architecture) , elasticity of substitution , market liquidity , econometrics , production (economics) , macroeconomics , interest rate , mathematics , history , social science , physics , geometry , archaeology , quantum mechanics , sociology , politics , law , political science
We consider a two‐sector infinite horizon economy with a fractional cash‐in‐advance constraint on consumption expenditures. This formulation allows us to consider a steady‐state velocity of money that is strictly greater than one and, therefore, provides a more plausible framework than the standard formulation in which all the consumption purchases are paid cash. We prove that the steady state is bound to be indeterminate and multiple equilibria occur when the share of the liquidity constraint is low enough and that a capital‐intensive investment good or a strongly capital‐intensive consumption good improve considerably the scope for indeterminacy. As a consequence, we show that without any restriction on the elasticity of intertemporal substitution in consumption, multiple equilibria might occur if the velocity of money is greater than a critical bound that is compatible with empirical estimates.