Monetary policy in a cash-in-advance economy: employment, capital accumulation, and the term structure of interest rates

In this paper we study the effects of monetary policies on employment, capital accumulation, consumption, and the term structure of interest rates in a cash-in-advance economy, where money is required for consumption expenditures. Monetary policy involves targeting the inflation rate. The detailed dynamics of the model are fully worked out. As no numerical analysis is involved, we are able to identify very clearly the different channels through which monetary policy will impinge on the important macroeconomic variables. The model is also used to discuss the `Great Canadian Slump.'