The Short-run 'Tobin Effect' in a Monetary Optimizing Model

Evan Koenig

Economic Inquiry, 1987, vol. 25, issue 1, 43-53

Abstract: In an economy in which households face a cash-in-advance constraint, the nominal interest rate acts like a tax on consumption. To the extent that investment is financed from current earnings and so escapes the interest rate tax, households will defer their consumption when the nominal interest rate is high. A short-run Tobin effect results: capital accumulates most rapidly when the interest rate is thought to be high relative to its past and future values. Copyright 1987 by Oxford University Press.

Date: 1987
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