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Money and capital

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

The effects of money (anticipated inflation) on capital formation is a classic issue in macroeconomics. Previous papers adopt reduced-form approaches, putting money in the utility function, or imposing cash in advance, but using otherwise frictionless models. We follow instead a literature that tries to be explicit about the frictions making money essential. This introduces new elements, including a two-sector structure with centralized and decentralized markets, stochastic trading opportunities, and bargaining. These elements matter quantitatively and numerical results differ from findings in the reduced-form literature. The analysis also reduces a gap between microfounded monetary economics and mainstream macro.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 58 (2011)
Issue (Month): 2 (March)
Pages: 98-116

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Handle: RePEc:eee:moneco:v:58:y:2011:i:2:p:98-116
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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