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Lucas meets Baumol and Tobin

Many issues that were traditionally analyzed using the Baumol-Tobin model can also be analyzed, perhaps more easily, using the Lucas (1980) cash-in-advance model where money serves both as a medium of exchange and as a store of value. This is illustrated by three examples (implications) of the Lucas model: (i) the velocity of money is time varying, volatile, and inflation-dependent; (ii) transitory money injections have expansionary real effects on output and employment; and (iii) the welfare cost of anticipated inflation is a couple of orders larger than the conventional estimates.

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