Lecture 9 (II): A Monetary Intertemporal Model
Jonathan Chiu
A Monetary Intertemporal Model
(1) A Preview of Money Demand
Current Money Demand
Future Money Demand
Nominal and Real Money Demand
Determinants of Real Money Demand
(1) Current Real Income
(2) Future Real Income
(3) Nominal Interest Rates
(2) The Representative Household
The Cash-in-Advance Constraint
PCm=M–
The Current-Period Budget Constraint
P (C m + C c) + PT + B d + M d = M – + (1+R -) + Pw(h-l) + P 
Optimality Conditions
 Current Credit Goods – Current Tradeoff: MRS l ,C c  w

Current Credit Goods – Future Credit Goods Tradeoff:
MRS C c ,C c '  1  r

Current Credit Goods – Current Cash Goods Tradeoff:
1
MRS C c ,C m 
1 R
Current Leisure – Current Cash Goods Tradeoff:
w
MRS l ,C m 
1 R

(3) Representative Firm
 Labour Demand
 Investment Demand
 Production of Cash and Credit Goods
(4) Government
Competitive Equilibrium in the Monetary Intertemporal Model
(1) The Current Labour Market
Demand
 Current Total Factor Productivity
 Current Capital Stock
Supply
 Current Real Interest Rate
 Present Value of Lifetime Taxes
 Previous Period’s Real Interest Rate
 Previous Period’s and Current Period Inflation
(2) The Current Goods Market
Supply
 Current Total Factor Productivity
 Current Capital Stock
 Present Value of Lifetime Taxes
 Previous Period’s Real Interest Rate
 Previous Period and Current Period Inflation
Demand
 Present Value of Taxes
 Current Government Spending
 Future Income
 Future Total Factor Productivity
 Current Capital Stock
 Previous Period’s Real Interest Rate
 Previous Period and Current Period Inflation
(3) The Current Money Market
Demand
 Current Real Income
 Future Real Income
 The Nominal Interest Rate
Supply
Using the Monetary Intertemporal Model
(1) A Level Increase in the Money Supply and Monetary Neutrality
(2) A Growing Money Supply and the Effects of Long-Run Inflation
i. Money Supply Growth and Inflation
ii. Output and Employment Effects
iii. Superneutrality
iv. Optimal Monetary Policy: The Friedman Rule
1. Deflation
2. Hyperinflation
(3) Temporary Decrease in Total Factor Productivity
 Real Effects

Price-Level Effects
(4) Shifts in Money Demand
Sources
Costs of Using Alternatives to Money
 Costs of Converting Other Assets into Money
 Government Regulations
 Inflation Risk
 Riskiness of Alternative Assets
Price-Level Effects
The Velocity of Money
Quantity Theory of Money and Monetarism
Price-Level Stabilization