Money and Capital: A Quantitative Analysis
Federal Reserve Bank of St. Louis Working Paper No. 2009-031A
58 Pages Posted: 10 Aug 2009
Date Written: August 2009
We study the effects of money (anticipated inflation) on capital formation. Previous papers on this topic adopt reduced-form approaches, putting money in the utility function or imposing cash in advance, but use otherwise frictionless models. We follow a literature that is more explicit about the frictions making money essential. This introduces several new elements, including a two-sector structure with centralized and decentralized markets, stochastic trading opportunities, and bargaining. We show how these elements matter qualitatively and quantitatively. Our numerical results differ from findings in the reduced-form literature. The analysis reduces the previously large gap between mainstream macro and monetary theory.
Keywords: money, capital, search
JEL Classification: E4, E5
Suggested Citation: Suggested Citation