Money and asset prices in a continuous-time Lucas and Stokey cash-in-advance economy

This paper develops a continuous-time version of the Lucas and Stokey [1987. Money and interest in a cash-in-advance economy. Econometrica 55, 491-513] cash-in-advance economy. The continuous-time setting allows for an exact characterization of equilibrium expected excess returns, real and nominal interest rates, the price level, and the inflation risk premium, for general preferences and stochastic processes. Explicit general-equilibrium solutions are obtained for separable logarithmic preferences and serially correlated processes for output and money growth. A characteristic feature of the economy is that even when preferences are separable in cash and credit goods, money supply still affects asset prices.