Journal of Economic Dynamics & Control 31 (2007) 2713–2743 Money and asset prices in a continuous-time Lucas and Stokey cash-in-advance economy Pierluigi Balduzzi à Carroll School of Management, Boston College, 438 Fulton Hall, 140 Commonwealth Avenue, Chestnut Hill, MA 02467, USA Received 10 December 2004; accepted 18 September 2006 Available online 14 November 2006 Abstract This paper develops a continuous-time version of the Lucas and Stokey [1987. Money and interest in a cash-in-advance economy. Econometrica 55, 491–513] cash-in-advance economy. The continuous-time setting allows for an exact characterization of equilibrium expected excess returns, real and nominal interest rates, the price level, and the inflation risk premium, for general preferences and stochastic processes. Explicit general-equilibrium solutions are obtained for separable logarithmic preferences and serially correlated processes for output and money growth. A characteristic feature of the economy is that even when preferences are separable in cash and credit goods, money supply still affects asset prices. r 2006 Elsevier B.V. All rights reserved. JEL classification: G12 Keywords: Cash-in-advance constraint 1. Introduction There is considerable evidence that the prices of real assets correlate significantly with both the expected and unexpected components of inflation, suggesting that real ARTICLE IN PRESS www.elsevier.com/locate/jedc 0165-1889/$ - see front matter r 2006 Elsevier B.V. All rights reserved. doi:10.1016/j.jedc.2006.09.007 à Tel.: +1 617 552 3976; fax: +1 617 552 0431. E-mail address: balduzzp@bc.edu.