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Money and capital: a quantitative analysis

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

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.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2009-031.

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Date of creation: 2009
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Handle: RePEc:fip:fedlwp:2009-031
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