Does money matter? A deterministic model with cash-in-advance constraints in factor markets

Abstract

This paper points to the importance of finance constraints in affecting competitive outcomes in economies that operate with money. We study a simple dynamic economy that operates through the use of fiat money under cash-in-advance constraints in all markets. We assume that the labor market opens before the goods market and the total money stock changes at a constant rate. After describing the economy, we define and characterize its stationary monetary competitive equilibria (Sl\ICE). In all cases where SMCE exist, the real wage is observed to be below the marginal product of labor and negatively related to the money growth rate, leaving positive pure profits to the firms. Only under Friedman's optimal money supply rule, zero pure profits are obtained. Neutrality of money is also studied in this context. In cases where the SMCE is unique, the equilibrium is Pareto efficient and money is neutral. In the case of continuum of equilibria and under sticky wages, which is consistent with market clearing in this model, the level of money stock can affect levels of output, employment, and welfare.