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Money and capital: a quantitative analysis

S. Boragan Aruoba (), Christopher Waller () and Randall Wright ()

No 2009-031, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We study the effects of money (anticipated inflation) on capital formation. Previous papers on this topic adopt reduced-form approaches, putting money in the utility function or imposing cash in advance, but use otherwise frictionless models. We follow a literature that is more explicit about the frictions making money essential. This introduces several new elements, including a two-sector structure with centralized and decentralized markets, stochastic trading opportunities, and bargaining. We show how these elements matter qualitatively and quantitatively. Our numerical results differ from findings in the reduced-form literature. The analysis reduces the previously large gap between mainstream macro and monetary theory.

Keywords: Money; Monetary theory; Capital; Search theory (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
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