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
Date Written: September 28, 2009
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: Suggested Citation