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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. Miquel Faig, 2004. "Divisible Money in an Economy with Villages," Econometric Society 2004 North American Summer Meetings 248, Econometric Society.
  2. Shouyong Shi, 1997. "A Divisible Search Model of Fiat Money," Econometrica, Econometric Society, vol. 65(1), pages 75-102, January.
  3. Shi Shouyong, 1997. "Search for a Monetary Propagation Mechanism," Working Papers 966, Queen's University, Department of Economics.
  4. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August.
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  8. 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.
  9. Uhlig, H., 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper 1995-97, Tilburg University, Center for Economic Research.
  10. Miquel Faig, 2001. "A search theory of money and commerce with Neoclassical production," Economics Working Papers 567, Department of Economics and Business, Universitat Pompeu Fabra.
  11. Andreas Hornstein & Pierre-Daniel Sarte, 1998. "Staggered prices and inventories: production smoothing reconsidered," Working Paper 98-08, Federal Reserve Bank of Richmond.
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  15. Nason, J.M. & Cogley, T., 1994. "Testing the Implications of Long Run Neutrality for Monetary Business Cycle Models," UBC Departmental Archives 94-26, UBC Department of Economics.
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  17. Kiyotaki, Nobuhiro & Wright, Randall, 1993. "A Search-Theoretic Approach to Monetary Economics," American Economic Review, American Economic Association, vol. 83(1), pages 63-77, March.
  18. Andolfatto, David, 1996. "Business Cycles and Labor-Market Search," American Economic Review, American Economic Association, vol. 86(1), pages 112-32, March.
  19. 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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  21. 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, issue Q IV, pages 10-28.
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Citations

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Cited by:
  1. Cordelius Ilgmann, Martin Menner, . "Negative Nominal Interest Rates: History and Current Proposals," Working Papers 201143, Institute of Spatial and Housing Economics, Munster Universitary.
  2. Martin Menner, 2009. "The role for search frictions for output and inflation dynamics: A Bayesian assessment," Working Papers. Serie AD 2009-06, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  3. Aruoba, S. Boragan & Waller, Christopher J. & Wright, Randall, 2011. "Money and capital," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 98-116, March.
  4. 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.
  5. S. Boragan Aruoba & Christopher J. Waller & Randall Wright, 2009. "Money and capital: a quantitative analysis," Working Papers 2009-031, Federal Reserve Bank of St. Louis.
  6. Ciżkowicz, Piotr & Hołda, Marcin & Rzońca, Andrzej, 2009. "Inflation and investment in monetary growth models," MPRA Paper 19307, University Library of Munich, Germany.
  7. Martin Menner, 2011. ""Gesell Tax" and Efficiency of Monetary Exchange," Working Papers. Serie AD 2011-26, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  8. Waller, Christopher J., 2011. "Random Matching And Money In The Neoclassical Growth Model: Some Analytical Results," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S2), pages 293-312, September.
  9. Shouyong Shi, 2006. "A Microfoundation of Monetary Economics," Working Papers tecipa-211, University of Toronto, Department of Economics.
  10. Menner, Martin, . "Monetary propagation in search-theoretic monetary models," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/503, Universidad Carlos III de Madrid.

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