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

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.