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Dynamic Analysis in an Optimizing Monetary Model with Transaction Costs and Endogenous Investment

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Abstract

This paper analyzes the period-to-period changes that occur in an optimizing monetary model with uncertainty and sticky prices. Money is incorporate in its role as a medium of exchange through a time-cost transactions techonolgy. Another important characteristic of the model is that both capital and investment are obtained endogenously. In this regar, adjustment costs of installing investment are incorporated to smooth and delay capital movements over the economic cycle. We will focus attention on analyzing the consumption, investment, and real money demand functions resulting from the model. These three equations gives rise to the structural IS-LM economy as part of the general equilibrium described in the paper. Nominal prices are sticky, i. e., they do not adjust instantly thereby allowing departures from general equilibrium obtained when there is absence of nominal frictions. We chose to have the Fuhrer-Moore specification for nominal contract prices. The model is calibrated on quarterly observations from United States data. Four types of exogenous shocks are included in our setup: production technology shocks, consumption preference (demand) shocks, monetary policy shocks, and shopping time shocks. Hence, variability of output, consumption, investment, etc., may result from several sources. The impact of each shock in the economic cyce will be examined by plotting impulse-response fuctions implied by the solution of the model.

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File URL: ftp://ftp.econ.unavarra.es/pub/DocumentosTrab/DT0108.PDF
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Bibliographic Info

Paper provided by Departamento de Economía - Universidad Pública de Navarra in its series Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra with number 0108.

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Length: 43 pages
Date of creation: 2001
Date of revision:
Publication status: Published in
Handle: RePEc:nav:ecupna:0108

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Keywords: money; dynami optimizing models; business cycle;

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Cited by:
  1. James Hamilton, 2000. "Indicator variables for optimal policy, comments," Proceedings, Federal Reserve Bank of San Francisco.
  2. Gern, Klaus-Jürgen, 2000. "Euroland: Konjunktur überschreitet Höhepunkt : wenig Anzeichen für eine New Economy," Open Access Publications from Kiel Institute for the World Economy 2501, Kiel Institute for the World Economy (IfW).
  3. Gern, Klaus-Jürgen, 2000. "Euroland: peak of the upswing - little evidence of a new economy," Kiel Discussion Papers 369, Kiel Institute for the World Economy (IfW).

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