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Inside Money, Credit, and Investment

  • Dressler, Scott
  • Li, Victor

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 develop a dynamic general equilibrium model that features financial intermediaries accepting deposits and providing loans, credit-producing firms, and inside (bank-created) money. It is shown that the transmission of monetary shocks facilitated by credit and inside money creation is able to reconcile these real and monetary observations regarding the cyclical behavior of investment.

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File URL: http://mpra.ub.uni-muenchen.de/1734/1/MPRA_paper_1734.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 1734.

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Date of creation: Jan 2007
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Handle: RePEc:pra:mprapa:1734
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  2. Jess Benhabib & Richard Rogerson & Randall Wright, 1991. "Homework in macroeconomics: household production and aggregate fluctuations," Staff Report 135, Federal Reserve Bank of Minneapolis.
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  13. Thomas F. Cooley & Gary D. Hansen, 1987. "The Inflation Tax in a Real Business Cycle Model," UCLA Economics Working Papers 496, UCLA Department of Economics.
  14. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity effects, monetary policy, and the business cycle," Discussion Paper / Institute for Empirical Macroeconomics 70, Federal Reserve Bank of Minneapolis.
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  25. Scott J. Dressler, 2007. "The Cyclical Effects Of Monetary Policy Regimes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(2), pages 551-573, 05.
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