 Money, liquidity, and the structure of productionJoshua Hendrickson and Alexander Salter Journal of Economic Dynamics and Control, 2016, vol. 73, issue C, 314-328 Abstract: We use a model in which media of exchange are essential to examine the role of liquidity and monetary policy on production and investment decisions in which time is an important element. Specifically, we consider the effects of monetary policy on the length of production time and entry and exit decisions for firms. We show that higher rates of inflation cause households to substitute away from money balances and increase the allocation of bonds in their portfolio thereby causing a decline in the real interest rate. The decline in the real interest rate causes the period of production to increase and the productivity thresholds for entry and exit to decline. This implies that when the real interest rate declines, prospective firms are more likely to enter the market and existing firms are more likely to stay in the market. Finally, we present reduced form empirical evidence consistent with the predictions of the model. Keywords: Monetary policy; Optimal stopping times; Entry and exit (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:73:y:2016:i:c:p:314-328 DOI: 10.1016/j.jedc.2016.10.001 Access Statistics for this article Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok More articles in Journal of Economic Dynamics and Control from Elsevier |
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