Real asset returns,inflation and activity in a small,open, Cash-in-Advance economy |
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| Affiliation: | 1. School of Humanities and Economic Management, China University of Geosciences, Beijing, China;2. Key Laboratory of Carrying Capacity Assessment for Resource and Environment, Ministry of Land and Resources, Beijing 100083, China;3. Open Lab of Talents Evaluation, Ministry of Land and Resources, Beijing 100083, China;4. Department of Science and Technology, Parthenope University of Naples, Centro Direzionale-Isola C4, 80143 Napoli, Italy;4. Department of Finance & Economics, Taibah University, Madina, Saudi Arabia |
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| Abstract: | The effects of inflation are worked out for a small open economy with Cash-in-Advance (CIA) constraints on bond purchases. If all transactions are subject to CIA constraints, an increase in the inflation rate will reduce savings, bringing about a current account deficit, while the capital stock will be unaffected. If investment is not subject to CIA constraints, an increase in the inflation rate will encourage investment and reduce savings, bringing about a current account deficit. Numerical evaluation of the model gives rise to falls in real interest rates that are in line with recent empirical findings. |
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