A Capital Market In an Equilibrium Business Cycle Model

Robert Barro

No 326, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Previous equilibrium "business cycle" models are extended by the incorporation of an economy-wide capital market. One aspect of this ex-tension is that the relative price that appears in commodity supply and demand functions becomes an anticipated real rate of return on earning assets, rather than a ratio of actual to expected prices. From the stand-point of expectation formation, the key aspect of the extended model is that observation of the economy-wide nominal interest rate conveys current global information to individuals. With respect to the effect of money supply shocks on output, the model yields results that are similar to those generated in simpler models. Anew result concerns the behavior of the anticipated real rate of return on earning assets. Because this variable is the pertinent relative price for commodity supply and demand decisions, it turns out to be unambiguous that positive money surprises raise the anticipated real rate of return. In fact, this response provides the essential channel in this equilibrium model by which a money shock can raise the supply of commodities and thereby increase output. However, it is possible through a sort of "liquidity" effect that positive money surprises can depress the economy-wide nominal interest rate.

Date: 1979-03
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published as Econometrica, Vol. 48, no. 6 (1980): 1393-1418.

Downloads: (external link)
http://www.nber.org/papers/w0326.pdf (application/pdf)

Related works:
Journal Article: A Capital Market in an Equilibrium Business Cycle Model (1980)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:0326

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w0326

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by (wpc@nber.org).