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Nominal Tales of (for) Real Economies: Taste for Inflation, Trade Money, Collaterals and Reserve Requirements

By Ana Paula Martins


This research explores the real effects of the monetization of a stylized one-sector capital growth model driven by rational representative agents. On the one hand, it introduces the appropriate adjustment to the state variable dynamic accounting equation to reflect a (paper) cash-in-advance or trade money finance constraint in the presence of exogenous real reserve requirements. Such constraint embeds real convertibility – even if not for idle real reserves-, conformable with the role of money as both general means of payment, unit of account and store of value, and with the purchase of money at the inverse of the (real product) general price level. Commodity money then arises as the special case of a 100% (real…) required reserve ratio. On the other, it suggests generalizations of the state equation that (also) encompass product immobilization – production-before-expenditure – constraints, as well as delays, or even real losses, along the money creation process, that, as the CIA assumption, reflect on inventory stock rotation. Additionally, one concludes that efficient outcomes require the use of (at least) two policy instruments. Two types of objective functions are considered: a standard accumulated discounted felicity function; and a point-wise utility function embedding bequest motives. Generalizations assuming taste for nominal growth at the utility level were staged for each case – taste for inflation may reflect psychological traits, compounding to and of similar nature to time discounting, implying distaste for increases in the (real) size of the nominal unit of account, working similarly to money illusion – possibly, to nominal discounting of utility over nominal arguments. Also, productivity enhancement due to nominal growth – working, say, through ease of inventory drainage – was simulated. Technically (mathematically), the hypotheses are convenient to generate non-negative growth of optimal per capita nominal money balances – and, therefore, prices – along the (and…) steady states. In real economies, price stability insures the constancy of money as measurement unit; such devices allowed to at least achieve a stable (non-negative) balanced inflation growth rate – but are consistent with residual barter trade of unsold merchandise. Nominal MIU was therefore also tested, as felicity functions combining real as nominal consumption as arguments. The analysis relies on a discrete methodology. A storable good economy is briefly confronted with some of the structures. Contrast (and merger) with a high-powered money supply multiplier mechanism is also briefly outlined. Time interval between transactions, the money rotation period, is endogenised.




  1. Nominal Conversion: the Banking System and the Financial Constraint


  1. Short-Run Dynamics and Steady-State Properties: A Mathematical Note
  2. Short-Run Dynamics and Steady-State Properties

3.1. Lagged Investment and Reserve Requirement

3.2. Infinite Lag Adjustment of Investment Loans

3.3. A Storable Good Economy


  1. Technical Progress and Balanced Growth Paths


  1. Extensions of MIU Modeling

5.1. “Taste for Real-Nominal Balance”

5.2. “Taste for Nominal Growth”

5.3. Discounted Nominal Utility


  1. Nominal Growth Productivity Effects


  1. Equilibrium: Wages, Rental Prices, and Interest Rates

7.1. (Inefficiency of the) Competitive Equilibrium

7.2 Infinitely Lived Firms and Long-Term Contracts: Q-Theories of Installed Capital and Old Labor Contracts


  1. A BIU Growth Model


  1. Optimal Fiscal and Monetary Policies; Money (M1) vs. Cash (Currency) -in-Advance

9.1. Endogenous Policy Parameters: Generalities

9.2. High-Powered Money Supply Multipliers

9.3. Money-in-Advance

9.3.1. “Unit-of-Account Neutrality”

9.3.2. Taste for Real-Nominal Balance

9.4. Money-in-Utility


  1. (Other) Taxes, Public(ly Provided) Goods, and (Other) Debt: a Final Discussion


  1. Conclusion




About Author

Dr. Ana Paula Martins studied Economics in Lisbon at Catholic University of Portugal (BA 1982) and concluded a Ph.D. in New York at the Graduate School of Arts and Sciences of Columbia University (1987). She has taught at both schools and at New University of Lisbon graduate and undergraduate courses. Currently, she is Assistant Professor at the Catholic University of Portugal, where she has been teaching Labor Economics and Econometrics. She has published theoretical and applied research articles in Labor Economics and Quantitative Methods in refereed academic journals, and also been presenter and participant in numerous international scientific Conferences on various fields. She was a member of the Catholic University Library Council representing the Economics field.



Date of Publication

July 15, 2018

File Size: 1907 KB
Length: x + 128 pages

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