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Show Me The Money: Retained Earnings And The Real Effects Of Monetary Shocks

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  • Matthias Doepke

    (UCLA)

Abstract

The empirical literature on monetary policy shocks documents that contractionary shocks are followed by a persistent rise in interest rates and a persistent fall in output. Standard monetary business cycle models can account for the initial effects of monetary shocks, but have difficulty generating persistence. In this paper, I examine whether frictions that affect the asset allocation decisions of households can lead to persistent effects. In the model economy, households hold two assets, one used for transactions (the checking account) and one used for investment (the savings account). There is a small transaction cost for moving funds between the accounts. Another key feature of the economy is that the business sector accumulates retained earnings and credits profits to the consumers only with a delay. I show that in this environment monetary shocks have persistent effects even when the adjustment cost is very small.

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Bibliographic Info

Paper provided by UCLA Department of Economics in its series UCLA Economics Working Papers with number 820.

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Date of creation: 01 Oct 2002
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Handle: RePEc:cla:uclawp:820

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  1. V.V. Chari & Lawrence J. Christiano & Martin Eichenbaum, 1995. "Inside money, outside money and short term interest rates," Working Paper Series, Macroeconomic Issues 95-13, Federal Reserve Bank of Chicago.
  2. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1998. "Sticky price models of the business cycle: can the contract multiplier solve the persistence problem?," Staff Report 217, Federal Reserve Bank of Minneapolis.
  3. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
  4. Coleman, Wilbur John, II, 1995. "Inside Money, Outside Money, and Short-Term Interest Rates: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1387-96, November.
  5. Schmitt-Grohé, Stephanie & Uribe, Martín, 2001. "Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function," CEPR Discussion Papers 2963, C.E.P.R. Discussion Papers.
  6. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
  7. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
  8. Olivier J. Blanchard, 1982. "Price Asynchronization and Price Level Inertia," NBER Working Papers 0900, National Bureau of Economic Research, Inc.
  9. Rotemberg, Julio J, 1995. "Inside Money, Outside Money, and Short-Term Interest Rates: Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1397-1401, November.
  10. Thomas F. Cooley & Gary D. Hansen, 1987. "The Inflation Tax in a Real Business Cycle Model," UCLA Economics Working Papers 496, UCLA Department of Economics.
  11. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
  12. repec:nbr:nberre:0126 is not listed on IDEAS
  13. Christiano, Lawrence J & Eichenbaum, Martin, 1992. "Liquidity Effects and the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 82(2), pages 346-53, May.
  14. Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 1999. "Money and Interest Rates with Endogeneously Segmented Markets," NBER Working Papers 7060, National Bureau of Economic Research, Inc.
  15. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity effects, monetary policy and the business cycle," Working Paper Series, Macroeconomic Issues 92-15, Federal Reserve Bank of Chicago.
  16. Dow, James Jr., 1995. "The demand and liquidity effects of monetary shocks," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 91-115, August.
  17. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  18. Cole, Harold L. & Ohanian, Lee E., 2002. "Shrinking money: the demand for money and the nonneutrality of money," Journal of Monetary Economics, Elsevier, vol. 49(4), pages 653-686, May.
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