Inflation and Capital Accumulation in a Two-Sector Cash-in-Advance Economy

Abstract

This paper studies a dynamic two-sector model in which money is introduced through a cash-in-advance constraint. A perfectly anticipated inflation changes the relative price between consumption goods, as they are differentially subject to the cash-in-advance constraint. Contrary to the conclusion of Stockman (1981), inflation may either increase or decrease capital accumulation, even though only consumption goods is subject to the cash-in-advance constraint.