This paper advances a model which can account for these five prominent facts of monetary economics. (i) Money is held in non trivial amounts even though it is a dominated asset. (ii) High rates of inflation lead to low rates of growth. (iii) Monetary injections momentarily depress the rate of interest. (iv) Hyper-inflations can be ended with a minimal loss of output. (v) Liquidity crises lead to recessions. The model advanced develops the second variation in Woodford (1990). The model is designed to capture three features of reality, which form the basis for modeling money as a dominated asset: Income and expenditures by households and firms are not synchronized. Money is used to transfer income from the time it is received to the time it is spent because real assets are costly to liquidate, and capital markets are imperfect. And money improves the allocation of resources by providing flexibility to the timing of consumption and investment. In this model, monetary shocks affect total factor productivity. Hence, the model offers a link between the real business cycle model and a monetary approach to the business cycle.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by University of Toronto, Department of Economics in its series Working Papers with number
faig-98-03.