THE COST OF CAPITAL, ASSET PRICES AND THE AFFECTS OF MONETARY POLICY

Edgar Ghossoub and Robert Reed
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Edgar Ghossoub: The University of Texas at San Antonio
Robert Reed: University of Alabama Tuscaloosa

No 68, Working Papers from College of Business, University of Texas at San Antonio

Abstract: The primary objective of this paper is to study the interaction between mon- etary policy, asset prices, and the sources of technological progress. We develop a two sector model in which ?nancial institutions promote risk sharing and ?at money alleviates trade frictions. Since the price of capital goods depends on in- ?ation, the Friedman Rule may be sub-optimal. In addition, di¤erent sources of productivity can a¤ect the degree of risk sharing. Although the optimal money growth rate falls in response to an increase in productivity in either sector of the economy, monetary policy should react more aggressively to investment-speci?c productivity. Our results are broadly consistent with U.S. monetary policy dur- ing the postwar period.

Keywords: Asset Prices; Investment; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E31 E44 E52 O16 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2009-02-27
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