The cash-in-advance constraint, also known as the Clower constraint after American economist Robert W. Clower, is an idea used in economic theory to capture monetary phenomena. In the most basic economic models (such as the Walras model or the Arrow–Debreu model) there is no role for money, as these models are not sufficiently detailed to consider how people pay for goods, other than t…The cash-in-advance constraint, also known as the Clower constraint after American economist Robert W. Clower, is an idea used in economic theory to capture monetary phenomena. In the most basic economic models (such as the Walras model or the Arrow–Debreu model) there is no role for money, as these models are not sufficiently detailed to consider how people pay for goods, other than to say everyone has a budget constraint. To be able to say anything about the money supply, inflation, monetary policy and so on, economists must therefore introduce additional assumptions into their models. One possibility, and the more popular one, is to introduce a cash-in-advance constraint a requirement that each consumer or firm must have sufficient cash available before they can buy goods. An alternative assumption would be a 'Money-in-the-Utility-Function' assumption pioneered by Miguel Sidrauski, which states that people have a tendency to hold a certain amount of cash because they derive utility from holding it. Without these (or similar) assumptions economic theory would find it difficult to explain why people carry around a good (money) which takes up space in their wallet, can't be consumed and does not earn any interest. Cash in advance is a term describing terms of purchase, when full payment for a good or service is due before the merchandise is shipped. This presents the least risk to a seller while having the most risk to the buyer. It is often combined with other terms such as Free On Board, which require the buyer to take possession of the merchandise as soon as it is loaded onto transportation, meaning the buyer …Cash in advance is a term describing terms of purchase, when full payment for a good or service is due before the merchandise is shipped. This presents the least risk to a seller while having the most risk to the buyer. It is often combined with other terms such as Free On Board, which require the buyer to take possession of the merchandise as soon as it is loaded onto transportation, meaning the buyer assumes the financial risk if the shipment is lost or damaged en route. In actual daily business these sort of terms are extremely rare unless the goods or services are of phenomenal value and high fragility. A constraint is any operating condition that puts a limit on the ability of a business to conduct its operations. The model The households budget constraint is ci t +k i t+1 + mi t p t = w hi t +r tk i t +(1 )ki t + i t 1 +(g t 1)M t 1 p t Œ m i t p t is the real value of money carried into the next period Œmi t 1 +(g 1)M 1 is money from the previous period plus transfers (or taxes) from the government Œg t is the gross growth rate of money: M t = g tM t 1 The cash-in-advance constraint is p t c i mi 1 +(gCash-in-advance constraint Transactionstechnology: m t=p t c t +k t+1 (1 d)k t (1) Requiresthatsome goods are purchased with money. Anoddfeature: I theCIAconstraintreallyisatechnology I itsoutput: transactionsservices I itsinputcanbeproducedatnocost 5/38Questions Model Description EquilibriumSteady state Cobb-Doglas utility CIA conclusions Model Money supply: ms t+1 = 1+m +1 ms t where m t+1 m s t = t t Bonds: b t, pay interest rate i t. Cash in advance constraint: p tc t mdt. In equilibrium, must have md t p t = c tCash in advance model Motivation In this lecture we will look at ways of introducing money into a neoclassical model and how these methods can be developed in an effort to try and explain certain facts. As in previous lectures, we shall find that while we can develop models to improve our understanding of the business cycle we still The overall model structure is that of the standard growth model. The timing within each period is crucial. 1. The household enters the period with capital kt and a stock of money md t 1. 2. He then receives a transfer of money from the gov-ernment. His period t money holdings are mt = mdt 1 + ˝t 3. ThehouseholdproducesandsellshisoutputformoneyThe chapter extends the cash-in-advance model to allow for multiple periods, develops an equilibrium characterization, and shows how to write the first steady state computational program. The model is then used to quantify the costs of inflation, determine that optimal policy implies Friedman’s rule, and compare the gains from lower inflation vs. higher In Advance Models 6 2. The velocity of money is one. Higher inflation reduces money demand only be reducing out-put. This is a direct consequence of the rigid CIA constraint and probably an undesirable result. Obviously, this would not be a good model of hyperinflation. 3. The Friedman rule ensures that the CIA constraint does not bind. It can be shown that thisAs an illustration, I consider the stylized model of Alvarez, Atkeson, and Kehoe (2002, 2009) where both nominal cash flows and segmentation are introduced. For simplicity, these models presume a binding cash-in-advance constraint, and hence the price level is proportional to money supply. Consumers can transfer cash between their “brokerage account” (where an intermediary with access to complete …The cash-in-advance is a useful framework to model monetary policy at the aggregate level. The model has initially been introduced by Lucas (1982) in order to study the determination of prices, interest rates, and exchange rates.
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