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A Search-Theoretic Monetary Business Cycle Model With Capital Formation

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  • Martin Menner

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Abstract

Search-theory has become the main paradigm for the micro-foundation of money. But no comprehensive business cycle analysis has been undertaken yet with a search-based monetary model. We extend the model with divisible goods and divisible money of Shi (JET, 1998) to allow for capital formation, analyze the monetary propagation mechanism and contrast the model .s implications with US business cycle stylized facts. With empirically plausible adjustment costs the model features a persistent propagation of monetary shocks and is able to replicate fairly well the volatility and cross-correlation with output of key US time series, including sales and inventory investment. We find that monetary policy shocks are unlikely to be an important source of business cycle fluctuations but discover another dimension where money matters: the very frictions that make money essential shape also the responses of variables to real shocks.

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Bibliographic Info

Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we056634.

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Date of creation: Oct 2005
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Handle: RePEc:cte:werepe:we056634

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  1. Aubhik Khan & Julia Thomas, 2003. "Inventories and the Business Cycle: An Equilibrium Analysis of (S,s) Policies," NBER Working Papers 10078, National Bureau of Economic Research, Inc.
  2. Uhlig, H., 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper, Tilburg University, Center for Economic Research 1995-97, Tilburg University, Center for Economic Research.
  3. Shi Shouyong, 1997. "Search for a Monetary Propagation Mechanism," Working Papers, Queen's University, Department of Economics 966, Queen's University, Department of Economics.
  4. Andreas Hornstein & Pierre-Daniel Sarte, 1998. "Staggered prices and inventories: production smoothing reconsidered," Working Paper, Federal Reserve Bank of Richmond 98-08, Federal Reserve Bank of Richmond.
  5. Dean Corbae & Ted Temzelides & Randall Wright, 2002. "Matching and Money," American Economic Review, American Economic Association, American Economic Association, vol. 92(2), pages 67-71, May.
  6. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
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  8. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
  9. Kiyotaki, Nobuhiro & Wright, Randall, 1991. "A contribution to the pure theory of money," Journal of Economic Theory, Elsevier, Elsevier, vol. 53(2), pages 215-235, April.
  10. Peter Rupert & Martin Schindler & Andrei Shevchenko & Randall Wright, 2000. "The search-theoretic approach to monetary economics: a primer," Economic Review, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, issue Q IV, pages 10-28.
  11. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, American Economic Association, vol. 86(1), pages 112-32, March.
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  16. Martin Boileau & Marc-André Letendre, 2004. "Inventories, Sticky Prices and the Propogation of Nominal Shocks," Department of Economics Working Papers 2004-03, McMaster University.
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Citations

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Cited by:
  1. S. Boragan Aruoba & Christopher J. Waller & Randall Wright, 2007. "Money and capital," Working Paper 0714, Federal Reserve Bank of Cleveland.
  2. Piotr Ciżkowicz & Marcin Hołda & Andrzej Rzońca, 2009. "Inflation and investment in monetary growth models," Bank i Kredyt, National Bank of Poland, Economic Institute, National Bank of Poland, Economic Institute, vol. 40(6), pages 9-40.
  3. Cordelius Ilgmann, Martin Menner, . "Negative Nominal Interest Rates: History and Current Proposals," Working Papers, Institute of Spatial and Housing Economics, Munster Universitary 201143, Institute of Spatial and Housing Economics, Munster Universitary.
  4. Chu, Angus C. & Kan, Kamhon & Lai, Ching-Chong & Liao, Chih-Hsing, 2014. "Money, random matching and endogenous growth: A quantitative analysis," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 41(C), pages 173-187.
  5. Martin Menner, 2006. "Monetary Propagation In Search-Theoretic Monetary Models," Economics Working Papers we066426, Universidad Carlos III, Departamento de Economía.
  6. S. Boragan Aruoba & Christopher J. Waller & Randall Wright, 2009. "Money and capital: a quantitative analysis," Working Papers, Federal Reserve Bank of St. Louis 2009-031, Federal Reserve Bank of St. Louis.
  7. Christopher J. Waller, 2009. "Random matching and money in the neoclassical growth model: some analytical results," Working Papers, Federal Reserve Bank of St. Louis 2009-034, Federal Reserve Bank of St. Louis.
  8. Martin Menner, 2011. ""Gesell Tax" and Efficiency of Monetary Exchange," Working Papers. Serie AD, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) 2011-26, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  9. Chu, Angus C. & Lai, Ching-Chong & Liao, Chih-Hsing, 2012. "Search and endogenous growth: when Romer meets Lagos and Wright," MPRA Paper 36691, University Library of Munich, Germany.
  10. Shouyong Shi, 2006. "A Microfoundation of Monetary Economics," Working Papers tecipa-211, University of Toronto, Department of Economics.

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