A monetary cash-in-advance model is known to be prone to real indeterminacy if the intertemporal elasticity of substitution in consumption is sufficiently low. Moreover, if the model features habit formation in consumption, the scope of indeterminacy increases substantially. This paper shows that many of the nominal frictions and real rigidities commonly used in the New Keynesian paradigm act to decrease the scope of this indeterminacy. These frictions include stickiness in prices and wages, adjustment costs in investment, and variable capacity utilization. When they are all used together in the model, the problem of indeterminacy nearly vanishes, even when habit formation in consumption is allowed.

This paper presents a dynamic specific-factors model with money introduced through a cash-in-advance constraint. Two types of consumption goods are produced, and three types of factors—labor, capital, and land—are used. The cash-in-advance constraint is imposed on different sets of goods. When the constraint is imposed exclusive of the investment, inflation affects the pattern (and volume) of trade through a commodity-substitution effect. When the constraint is imposed inclusive of the investment, inflation may affect the pattern of trade through both the commodity-substitution effect and the factor-supply effect. In each case, we examine and prove the dynamic stability property of the steady-state equilibrium.