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Money and capital: a quantitative analysis

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  • S. Boragan Aruoba
  • Christopher J. Waller
  • Randall Wright

Abstract

We study the effects of money (anticipated inflation) on capital formation. Previous papers on this topic adopt reduced-form approaches, putting money in the utility function or imposing cash in advance, but use otherwise frictionless models. We follow a literature that is more explicit about the frictions making money essential. This introduces several new elements, including a two-sector structure with centralized and decentralized markets, stochastic trading opportunities, and bargaining. We show how these elements matter qualitatively and quantitatively. Our numerical results differ from findings in the reduced-form literature. The analysis reduces the previously large gap between mainstream macro and monetary theory.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2009-031.

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Date of creation: 2009
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Handle: RePEc:fip:fedlwp:2009-031

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Keywords: Money ; Monetary theory ; Capital ; Search theory;

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References

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Citations

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Cited by:
  1. Lucy Qian Liu & Liang Wang & Randall Wright, 2009. "“On the ‘Hot Potato Effect’ of Inflation: Intensive versus Extensive Margins”," PIER Working Paper Archive 09-040, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  2. Stephen Williamson & Randall Wright, 2010. "New monetarist economics: methods," Review, Federal Reserve Bank of St. Louis, issue May, pages 265-302.
  3. Williamson, Stephen & Wright, Randall, 2010. "New Monetarist Economics: Models," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 2, pages 25-96 Elsevier.

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