Dynamic Analysis in an Optimizing Monetary Model with Transaction Costs and Endogenous Investment

Miguel Casares

No 108, Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra from Departamento de Economía - Universidad Pública de Navarra

Abstract: This paper analyzes the period-to-period changes that occur in an optimizing monetary model with uncertainty and sticky prices. Money is incorporate in its role as a medium of exchange through a time-cost transactions techonolgy. Another important characteristic of the model is that both capital and investment are obtained endogenously. In this regar, adjustment costs of installing investment are incorporated to smooth and delay capital movements over the economic cycle. We will focus attention on analyzing the consumption, investment, and real money demand functions resulting from the model. These three equations gives rise to the structural IS-LM economy as part of the general equilibrium described in the paper. Nominal prices are sticky, i. e., they do not adjust instantly thereby allowing departures from general equilibrium obtained when there is absence of nominal frictions. We chose to have the Fuhrer-Moore specification for nominal contract prices. The model is calibrated on quarterly observations from United States data. Four types of exogenous shocks are included in our setup: production technology shocks, consumption preference (demand) shocks, monetary policy shocks, and shopping time shocks. Hence, variability of output, consumption, investment, etc., may result from several sources. The impact of each shock in the economic cyce will be examined by plotting impulse-response fuctions implied by the solution of the model.

Keywords: money; dynami optimizing models; business cycle (search for similar items in EconPapers)
JEL-codes: E13 E32 E41 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2001
New Economics Papers: this item is included in nep-ifn and nep-mon
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Citations: View citations in EconPapers (6)

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