A Capital Market In an Equilibrium Business Cycle Model
Previous equilibrium "business cycle" models are extended by the incorporation of an economy-wide capital market. One aspect of this ex-tension is that the relative price that appears in commodity supply and demand functions becomes an anticipated real rate of return on earning assets, rather than a ratio of actual to expected prices. From the stand-point of expectation formation, the key aspect of the extended model is that observation of the economy-wide nominal interest rate conveys current global information to individuals. With respect to the effect of money supply shocks on output, the model yields results that are similar to those generated in simpler models. Anew result concerns the behavior of the anticipated real rate of return on earning assets. Because this variable is the pertinent relative price for commodity supply and demand decisions, it turns out to be unambiguous that positive money surprises raise the anticipated real rate of return. In fact, this response provides the essential channel in this equilibrium model by which a money shock can raise the supply of commodities and thereby increase output. However, it is possible through a sort of "liquidity" effect that positive money surprises can depress the economy-wide nominal interest rate.
|Date of creation:||Mar 1979|
|Date of revision:|
|Publication status:||published as Econometrica, Vol. 48, no. 6 (1980): 1393-1418.|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Barro, Robert J, 1974.
"Are Government Bonds Net Wealth?,"
Journal of Political Economy,
University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
- Thomas J. Sargent, 1973. "Rational Expectations, the Real Rate of Interest, and the Natural Rate of Unemployment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(2), pages 429-480.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:0326. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.