Investment and the Nominal Interest Rate: The Variable Velocity Case

Evan Koenig

Economic Inquiry, 1989, vol. 27, issue 2, 325-44

Abstract: Models treating money either as a consumer good or as a producer good are encompassed by a model in which both households and firms use money as a buffer between receipts and expenditures. A rise in nominal interest rates increases resources devoted to intermediation, while discouraging purchases financed from accumulated cash. If investment is financed from contemporaneous earnings, there is a tendency to substitute out of consumption and into investment when interest rates are high. Greater resources devoted to intermediation generate a negative wealth effect. The net impact on investment is ambiguous. Copyright 1989 by Oxford University Press.

Date: 1989
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