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Federal Reserve Bank of St. Louis
Working Papers
Money and capital: a quantitative analysis
S. Boragan Aruoba
Christopher J. Waller
Randall Wright
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.


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S. Boragan Aruoba & Christopher J. Waller & Randall Wright, Money and capital: a quantitative analysis, Federal Reserve Bank of St. Louis, Working Papers 2009-031, 2009.
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Keywords: Money ; Monetary theory ; Capital ; Search theory
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