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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.

Suggested Citation

  • S. Boragan Aruoba & Christopher J. Waller & Randall Wright, 2009. "Money and capital: a quantitative analysis," Working Papers 2009-031, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2009-031
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    Cited by:

    1. Stephen D. Williamson & Randall Wright, 2010. "New monetarist economics: methods," Review, Federal Reserve Bank of St. Louis, issue May, pages 265-302.
    2. 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.
    3. Liu, Lucy Qian & Wang, Liang & Wright, Randall, 2011. "On The “Hot Potato” Effect Of Inflation: Intensive Versus Extensive Margins," Macroeconomic Dynamics, Cambridge University Press, vol. 15(S2), pages 191-216, September.
    4. Yuan Yuan, 2014. "Funding Liquidity and Market Liquidity," DETU Working Papers 1406, Department of Economics, Temple University.

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    Keywords

    Money ; Monetary theory ; Capital ; Search theory;

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