Real Effects of Monetary Shocks in an Economy with Sequential Purchases

70 Pages Posted: 11 Jul 2007 Last revised: 14 Aug 2022

See all articles by Robert E. Lucas

Robert E. Lucas

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Michael Woodford

Columbia University, Graduate School of Arts and Sciences, Department of Economics

Date Written: January 1993

Abstract

We study the effects of monetary disturbances in an economy in which sellers must deal with potential buyers in sequence, rather than being able to sell their goods in a Walrasian auction market. Because of the structure of trading assumed, the current state of demand is not revealed to sellers until after the process of sequential transactions has concluded. As a consequence, unanticipated changes in nominal spending flows induce less-than-proportional responses in nominal transaction prices, and changes in the same direction in real output. These effects are similar to those obtained if sellers must commit themselves in advance to money prices, but do not depend upon any cost of changing prices. We fully characterize the stationary intertemporal equilibrium of an economy subject to i.i.d. money supply shocks. We show how the ex ante distribution of monetary shocks affects sellers' pricing strategies, and hence the equilibrium relation between the money supply, the distribution of transaction prices, and the degree to which available productive capacity is utilized.

Suggested Citation

Lucas, Robert E. and Woodford, Michael, Real Effects of Monetary Shocks in an Economy with Sequential Purchases (January 1993). NBER Working Paper No. w4250, Available at SSRN: https://ssrn.com/abstract=478704

Robert E. Lucas (Contact Author)

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Michael Woodford

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States