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Money, capital, and real liquidity effects with habit formation

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  • Arman Mansoorian
  • 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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Bibliographic 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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Cited by:
  1. Shu-Hua Chen, 2012. "On the Growth and Stability Effects of Habit Formation and Durability in Consumption," Annals of Economics and Finance, Society for AEF, vol. 13(2), pages 283-298, November.
  2. Buffie, Edward F. & Atolia, Manoj, 2012. "Resurrecting the weak credibility hypothesis in models of exchange-rate-based stabilization," European Economic Review, Elsevier, vol. 56(3), pages 361-372.

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