Variation 5: Differentiated goods, multiple means of payment, and alternative specifications of government activities

In the previous two chapters, our treatment of government activities in our discussion of economies subject to various cash-in-advance constraints has been rather crude. However, in this chapter we present more detailed specifications of some government activities, and it turns out that modifications both of the revenue and the expenditure side of the government’s budget constraint can substantially change the interaction of inflation and capital formation. We use the framework introduced in chapter 8, and to keep the analysis as transparent as possible we concentrate on constellations with an ‘exogenous cash-in-advance constraint’. Two specifications of this set-up are considered.