Money and Capital as Competing Media of Exchange in a News Economy

Federal Reserve Bank of St. Louis Working Paper 2009-046B

22 Pages Posted: 16 Sep 2009 Last revised: 3 Nov 2009

See all articles by David Andolfatto

David Andolfatto

Simon Fraser University (SFU) - Department of Economics; Federal Reserve Bank of St. Louis

Fernando M. Martin

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: September 28, 2009

Abstract

We study the effects of money (anticipated inflation) on capital formation. Previous papers on this 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 that make 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 also reduces the gap between monetary theory and mainstream macro.

Keywords: money, capital, news, excess volatility

JEL Classification: E4, E5

Suggested Citation

Andolfatto, David and Martin, Fernando M., Money and Capital as Competing Media of Exchange in a News Economy (September 28, 2009). Federal Reserve Bank of St. Louis Working Paper 2009-046B, Available at SSRN: https://ssrn.com/abstract=1473846 or http://dx.doi.org/10.2139/ssrn.1473846

David Andolfatto (Contact Author)

Simon Fraser University (SFU) - Department of Economics ( email )

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Federal Reserve Bank of St. Louis ( email )

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Fernando M. Martin

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-7350 (Phone)

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