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Money and Capital

  • S. Boragan Aruoba

    ()

    (Economics University of Maryland)

  • Christopher J. Waller

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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Paper provided by Society for Economic Dynamics in its series 2005 Meeting Papers with number 550.

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Date of creation: 2005
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Handle: RePEc:red:sed005:550
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