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Inside money, credit, and investment

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  • Dressler, Scott J.
  • Li, Victor E.

Abstract

This paper presents a monetary explanation for several business-cycle facts: (i) household and business investment are procyclical, (ii) business investment lags household investment, (iii) household investment is positively correlated with M1, and (iv) household credit outstanding is positively correlated with and more volatile than household investment. We extend a standard, dynamic general equilibrium model to include financial intermediaries, credit-producing firms, and inside (bank-created) money. The transmission of monetary shocks facilitated by credit and inside money creation in the model is able to reconcile these real and monetary observations regarding the cyclical behavior of investment.

Suggested Citation

  • Dressler, Scott J. & Li, Victor E., 2009. "Inside money, credit, and investment," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 970-984, April.
  • Handle: RePEc:eee:dyncon:v:33:y:2009:i:4:p:970-984
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    Citations

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    Cited by:

    1. Kydland, Finn E. & Rupert, Peter & Šustek, Roman, 2014. "Housing dynamics over the business cycle," LSE Research Online Documents on Economics 86334, London School of Economics and Political Science, LSE Library.
    2. repec:eee:jmacro:v:54:y:2017:i:pb:p:149-160 is not listed on IDEAS
    3. Totzek, Alexander, 2009. "Banks and early deposit withdrawals in a new Keynesian framework," Economics Working Papers 2009-08, Christian-Albrechts-University of Kiel, Department of Economics.
    4. Victor E. Li, 2012. "Monetary Transmission and the Search for Liquidity," Villanova School of Business Department of Economics and Statistics Working Paper Series 19, Villanova School of Business Department of Economics and Statistics.
    5. Roman Sustek & Peter Rupert & Finn Kydland, 2012. "Housing Dynamics," 2012 Meeting Papers 315, Society for Economic Dynamics.
    6. Carlos Garriga & Finn E. Kydland & Roman Sustek, 2013. "Mortgages and Monetary Policy," NBER Working Papers 19744, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Inside money Credit creation Durable consumption Business cycles;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • E39 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Other
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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