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Money Balances, Commodity Inventories, and Inflationary Expectations

This paper evaluates the effects of inflationary expectations within an extended inventory model of the determination of optimal money holdings and commodity inventories. One important innovation is to introduce into the consumption bundle a commodity which is purchased less frequently than income is received. A second innovation is to consider household use of earning assets as a store of savings balances rather than working balances. The analysis shows that the effects of inflationary expectations on optimal commodity inventories and money holdings depend critically on whether the household holds part of its savings balance as earning assets. For example, if the household holds its savings balance only as money, and if the real rate of return on earning assets is constant, an increase in the expected rate of inflation would induce a reduction in total money holdings and also, somewhat surprisingly, a reduction in total commodity inventories.