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Inside money, credit, and investment

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Author Info
Dressler, Scott J.
Li, Victor E.

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Abstract

This paper presents a monetary explanation for several business-cycle facts: (i) household and business investment are procyclical, (ii) business investment lags household investment, (iii) household investment is positively correlated with M1, and (iv) household credit outstanding is positively correlated with and more volatile than household investment. We extend a standard, dynamic general equilibrium model to include financial intermediaries, credit-producing firms, and inside (bank-created) money. The transmission of monetary shocks facilitated by credit and inside money creation in the model is able to reconcile these real and monetary observations regarding the cyclical behavior of investment.

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Publisher Info
Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 33 (2009)
Issue (Month): 4 (April)
Pages: 970-984
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Handle: RePEc:eee:dyncon:v:33:y:2009:i:4:p:970-984

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Related research
Keywords: Inside money Credit creation Durable consumption Business cycles;

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References listed on IDEAS
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    Other versions:
  2. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  3. Greenwood, J. & Hercowitz, Z., 1991. "The Allocation of Capital and Time Over the Business Cycle," RCER Working Papers 268, University of Rochester - Center for Economic Research (RCER).
    Other versions:
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  6. Lawrence J. Christiano & Richard M. Todd, 1996. "Time to plan and aggregate fluctuations," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-27. [Downloadable!]
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  11. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April. [Downloadable!] (restricted)
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  13. Christiano, Lawrence J, 2002. "Solving Dynamic Equilibrium Models by a Method of Undetermined Coefficients," Computational Economics, Springer, vol. 20(1-2), pages 21-55, October. [Downloadable!]
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  16. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, vol. 79(4), pages 733-48, September. [Downloadable!] (restricted)
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  17. Li, Victor E. & Chang, Chia-Ying, 2004. "The cyclical behavior of household and business investment in a cash-in-advance economy," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 691-706, January. [Downloadable!] (restricted)
  18. Mark Gertler & Simon Gilchrist, 1993. "The role of credit market imperfections in the monetary transmission mechanism: arguments and evidence," Finance and Economics Discussion Series 93-5, Board of Governors of the Federal Reserve System (U.S.).
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  19. Balke, Nathan S. & Wynne, Mark A., 2000. "An equilibrium analysis of relative price changes and aggregate inflation," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 269-292, April. [Downloadable!] (restricted)
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  20. Finn E. Kydland & Edward C. Prescott, 1990. "Business cycles: real facts and a monetary myth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-18. [Downloadable!]
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  22. Richard D. Porter & Ruth A. Judson, 1996. "The location of U.S. currency: how much is abroad?," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 883-903.
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