Lecture 4 - 1 MONEY& INFLATION PART I MONEY&...

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Unformatted text preview: 10/7/2009 1 MONEY & INFLATION PART I MONEY & INFLATION – PART II EC205 ‐ ALPER ‐ SUMMER 2009 1 Outline y The Cagan Model y Seigniorage y The Welfare Costs of Inflation EC205 ‐ ALPER ‐ SUMMER 2009 2 The Cagan Model y A model that shows how current and future money affect the price level y Money demand at time t: y Money Market Equilibrium: EC205 ‐ ALPER ‐ SUMMER 2009 3 ( ) d t t t 1 t M L i ,Y k P : sensitivity of money demand to inflation γ π γ − + ⎛ ⎞ = = ⎜ ⎟ ⎝ ⎠ t 1 M k P γ π − + = 10/7/2009 2 y Assumptions y Income and real interest rates are constant y Leave out i and Y in writing money demand function y Notation: lower case letters denote natural logs: etc. , ln ln t t t t P p M m = = y Take the natural log of both sides of the money market equilibrium condition: EC205 ‐ ALPER ‐ SUMMER 2009 4 t t 1 t M k P γ π − + = ( ) t t t 1 t m p p p Why?...
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Lecture 4 - 1 MONEY& INFLATION PART I MONEY&...

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