A Monetary Equilibrium Model With Transactions Costs (Classic Reprint)

December 1, 2018|
A Monetary Equilibrium Model With Transactions Costs (Classic Reprint) by Julio Rotemberg
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Excerpt from A Monetary Equilibrium Model With Transactions Costs

The objective of this paper is to study the competitive equilibrium of an economy in which people hold money for transactions purposes. As in the models of Baumol Tobin Stockman Townsend (1982) and Jovanovic but in contrast to those of Grandmont and Younes Lucas (1980) and Helpman households are also allowed to hold interest bearing capital in addition to barren money. The main advantage of the present model is that it is able to shed light on the effects of such nonsteady state events as open market operations.

Households pick the path of consumption optimally from their point of view. Because it is costly to carry out financial transactions, people visit their financial intermediary only occasionally. However, I do not let house holds pick optimally the length of the period during which they do not visit their bank. For tractability, the assumption is made that households have a constant interval during which they carry out no financial transactions.

A crucial feature of this paper is that, as in all free market econ omies, different households visit their banks at different times. This leads to conclusions which are strikingly Keynesian. Government interventions, and in particular open market operations, have the ability to affect aggregate output and the real rate of interest. This is true even though the model features no uncertainty, full information, perfect foresight and perfectly competitive markets for goods and money. Moreover, the effects of monetary policies closely resemble those found in standard textbooks. In particular, a one period monetary expansion leads to a higher level of output which persists for some time. It also concurrently leads to low real interest rates.

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Title:A Monetary Equilibrium Model With Transactions Costs (Classic Reprint)
Dimensions:34 pages, 9 X 6 X 0.07 in
Published:December 1, 2018
Publisher:FB&C Ltd
Appropriate for ages:All ages
ISBN - 13:9781332270606

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