Academic journal article Journal of Money, Credit & Banking

Money, Social Status, and Capital Accumulation in a Cash-in-Advance Model

Academic journal article Journal of Money, Credit & Banking

Money, Social Status, and Capital Accumulation in a Cash-in-Advance Model

Article excerpt

IN GROWTH AND ASSET-PRICING MODELS, wealth accumulation is often taken to be solely driven by one's desire to increase consumption rewards. The representative agent chooses his consumption path to maximize his discounted utility, which is defined only on consumption. Whereas this motive is important for wealth accumulation, it is, however, not the only motive. As social animals, people accumulate wealth also to gain prestige, social status, and power in the society. Possession of wealth is, to a considerable degree, a measure and standard of a person's success in a society. There is a recent literature that has paid attention to this motive(1) which cogently argues that concern for social status is instrumental in obtaining nonmarket goods. For example, Cole, Mailath, and Postlewaite (1992) have presented a model in which people care about relative wealth because relative wealth affects mating. When matching is positively assortative on wealth, individuals who are higher in the wealth distribution for their sex will end up with richer mates and higher consumption. In particular, they have shown that if wealth determines the pattern of marriage, the reduced-form preferences of individuals will take the structure as follows:


where u(.,.) is the utility function, C is consumption, and W is wealth. Another interpretation of this model is in line with the spirit of capitalism in the sense of Weber (1958, p. 53): "Man is dominated by the making of money, by acquisition as the ultimate purpose of his life. Economic acquisition is no longer subordinated to man as the means for the satisfaction of this material need. This reversal of what we should call the natural relationship ... is evidently a leading principle of capitalism."(2)

With the wealth-is-status or the-spirit-of-capitalism model, many studies have tried to offer new perspectives on economic growth, savings, and asset pricing. In this paper, we extend the wealth-is-status model from a real economy to a monetary economy and examine how inflation and monetary growth affect capital accumulation. The relationship between inflation and growth has been a controversial topic in macroeconomics since the 1960s. In an early contribution, Tobin (1965) demonstrates a positive effect of inflation on capital accumulation as a result of portfolio shift from non-interest-bearing real balances to the capital stock. Since then, many plausible models based on explicit optimization over an infinite horizon have been produced. The famous infinite-horizon model belongs to Sidrauski (1967). He shows that if the agent maximizes an additive, discounted lifetime utility defined on consumption and real balances, and if the marginal product of capital depends only on the capital-labor ratio, then the steady-state value of capital accumulation is independent of monetary growth or inflation. This result is known as the superneutrality of money.

However, in a significant contribution to the literature, Stockman (1981) imposes the cash-in-advance constraint on both consumption and investment, and obtains the surprising result that a permanent increase in the rate of monetary growth leads to a decrease in the steady-state value of the capital stock. Yet if the cash-in-advance constraint applies only to consumption, then money is still superneutral in the long run.(3) How does the inclusion of the wealth-is-status factor alter the conclusions in the Stockman model? This is our main task here.

The paper is organized as follows. Section 1 sets up an optimal growth model with both the social-status concern and the cash-in-advance constraint on consumption and investment. Section 2 analyzes the effects of monetary growth on the steady-state capital stock. It is shown that (1) with cash for consumption, inflation leads to more capital accumulation in the long run; and (2) with cash for both consumption and investment, inflation has an ambiguous effect on capital accumulation. …

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