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Marco Del Negro, Teoria y Politica Monetaria, Spring 2000
Problem Set 3
In the cash-in-advance model studied in class assume that people are able to invest not
only in nominal money balances, but also in bonds. That is, the household's problem is now:
subject to:
where Bts is the supply of nominal (one period) bonds, Rt is the
it nominal interest rate, and Tt are transfers from the government.
The budget constraint of the government is:
Mt+1s+Bt+1s=Mts+Bts(1+Rt)+Tt
Show that the reduced form of this model is the same as in the Sidrauski-Brock
model studied in class 7, which is:
subject to
Marco Del Negro
2000-01-29