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Investment and the nominal interest rate: the variable velocity case

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  • Evan F. Koenig

Abstract

Models treating money either as a consumer good or as a producer good are encompassed by a model in which both households and firms use money as a buffer between receipts and expenditures. A rise in nominal interest rates increases resources devoted to intermediation, while discouraging purchases financed from accumulated cash. If investment is financed from contemporaneous earnings, there is a tendency to substitute out of consumption and into investment when interest rates are high. Greater resources devoted to intermediation generate a negative wealth effect. The net impact on investment is ambiguous. Copyright 1989 by Oxford University Press.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Dallas in its series Research Paper with number 8805.

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Date of creation: 1988
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Handle: RePEc:fip:feddrp:8805

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Keywords: Interest rates ; Velocity of money;

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References

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  1. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 8(3), pages 387-393.
  2. Julio J. Rotemberg, 1982. "A Monetary Equilibrium Model with Transactions Costs," NBER Working Papers 0978, National Bureau of Economic Research, Inc.
  3. Evan F. Koenig, 1988. "Investment and the nominal interest rate: the variable velocity case," Research Paper, Federal Reserve Bank of Dallas 8805, Federal Reserve Bank of Dallas.
  4. Fischer, Stanley, 1979. "Capital Accumulation on the Transition Path in a Monetary Optimizing Model," Econometrica, Econometric Society, Econometric Society, vol. 47(6), pages 1433-39, November.
  5. Mankiw, N Gregory & Summers, Lawrence H, 1986. "Money Demand and the Effects of Fiscal Policies," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 18(4), pages 415-29, November.
  6. Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, Elsevier, vol. 17(2), pages 271-291, March.
  7. Cohen, Daniel, 1985. "Inflation, wealth and interest rates in an intertemporal optimizing model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(1), pages 73-85, July.
  8. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Sweeney, R J, 1984. "Anticipate Counter-cyclical Monetary Policy," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 22(1), pages 28-36, January.
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Cited by:
  1. Evan F. Koenig, 1989. "Are the permanent-income model of consumption and the accelerator model of investment compatible?," Research Paper, Federal Reserve Bank of Dallas 8915, Federal Reserve Bank of Dallas.
  2. Koenig, Evan F, 1990. "Real Money Balances and the Timing of Consumption: An Empirical Investigation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(2), pages 399-425, May.
  3. Jill A. Holman & Felix K. Rioja, 1998. "International transmission of anticipated inflation under alternative exchange-rate regimes," Research Working Paper, Federal Reserve Bank of Kansas City 99-04, Federal Reserve Bank of Kansas City.
  4. Wu, Yangru & Zhang, Junxi, 1998. "Endogenous growth and the welfare costs of inflation: a reconsideration," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 22(3), pages 465-482, March.
  5. Koenig, Evan F, 1989. "Investment and the Nominal Interest Rate: The Variable Velocity Case," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 27(2), pages 325-44, April.

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