STEADY-STATE REAL EFFECTS OF INFLATION IN A HECKSCHER–OHLIN CASH-IN-ADVANCE MODEL

This paper explores the possible real effects of inflation within a two-sector neoclassical growth model of the Heckscher–Ohlin type with a cash-in-advance constraint on the purchases of consumption goods. The main findings are that the relative prices of both factors and of both goods, which are li...

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Bibliographic Details
Published in:Macroeconomic dynamics 2004-11, Vol.8 (5), p.633-647
Main Author: CHUANG, SHI-FENG
Format: Article
Language:English
Subjects:
Capital stock
Competition
Consumption
Economic models
Economic theory
Household utilities
Inflation
Investments
Labor supply
Leisure
Macroeconomics
Prices
Production functions
Studies
Utility functions
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Summary:This paper explores the possible real effects of inflation within a two-sector neoclassical growth model of the Heckscher–Ohlin type with a cash-in-advance constraint on the purchases of consumption goods. The main findings are that the relative prices of both factors and of both goods, which are linked via a Stolper–Samuelson relation, depend only on the rate of time preference, not on any monetary variable; that the steady-state level of total capital can be influenced by inflation if the capital intensities and the cash requirements in both sectors differ, leading to Tobin effects or reversed Tobin effects; and that higher inflation unambiguously reduces total labor supply and leads to a reversed Tobin effect in most cases if the labor/leisure choice is endogenized.
ISSN:1365-1005
1469-8056
DOI:10.1017/S1365100504040015