Money, inflation, and capital formation in a model of overlapping generations with multiple means of payment

The assessment of the long-run effects of inflation on real activity in the monetary growth literature depends largely on whether a model supports the substitutability or complementarity hypothesis regarding money and capital. This paper develops a small intertemporal equilibrium model in which either hypothesis can be addressed, depending on whether a barrier to extending credit becomes binding or not. When the barrier is not binding, money and capital act as close substitutes, making the Tobin effect likely to prevail under determinate adjustment dynamics towards the long-run equilibrium. When the barrier is binding, the anti-Tobin effect, as suggested by the complementarity hypothesis, becomes more likely, and adjustment dynamics may turn locally indeterminate. Copyright 2002, Oxford University Press.