Money, capital, and real liquidity effects with habit formation

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Money, capital, and real liquidity effects with habit formation

Author Info

Arman Mansoorian
Leo Michelis

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Leo Michelis

Abstract

The money in utility model is reconsidered in the presence of endogenous labour and habits. With standard assumptions about preferences and a policy rule that sets the nominal interest rate by adjusting the growth rate of money, the model exhibits superneutrality in the steady state. Nevertheless, habits give rise to real liquidity effects in the short run. After an increase in the nominal interest rate, employment falls, resulting in a fall in capital accumulation and in the short- and long-term real interest rates. The adjustment of the capital stock is non-monotonic. Employment and the short- and long-term real interest rates may also adjust non-monotonically.

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Publisher Info
Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 38 (2005)
Issue (Month): 2 (May)
Pages: 430-453
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Handle: RePEc:cje:issued:v:38:y:2005:i:2:p:430-453

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Related research
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Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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Edward F. Buffie & Manoj Atolia, 2006. "Resurrecting the Weak Credibility Hypothesis in Models of Exchange-Rate-Based Stabilization," Working Papers wp2009_01_03, Department of Economics, Florida State University, revised Aug 2007. [Downloadable!]

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