Three essays on monetary business cycle models with spatial separation

Kevin L Reffett, Purdue University

Abstract

This investigation examines the role that money and financial intermediation play in explaining both long-run and short-run economic fluctuations observed in monetary economies over the duration of the business cycle. Attention is restricted to a class of equilibrium business cycle models that are specified at the level of taste, technology, endowment, and information. Essay one constructs a monetary business cycle model with spatial separation. Agents solve standard utility maximization problems. Household utility is defined over both the consumption goods endowed to their home location and the consumption goods endowed to the location directly to their east. Because of the trading frictions introduced by spatial separation, agents must use money to facilitate transactions outside their home locations. Finally, the monetary agent is endowed with an imperfect monetary control technology. It is shown that serially correlated errors in the control technology generate a positive relationship between unanticipated monetary policy and output. Essay two extends this results to the cash in advance framework I begin by constructing an exchange environment that might lead to liquidity constraints of the form. The environment described is an exchange setting in which households are spatially separated, endowed with a production facility to produce home consumption good, but not given the capital resources necessary to operate. Because they must acquire the needed capital input goods one period prior to actually using them in production, the timing of the relationship between money and output is lagged. The importance of this timing result is discussed. Essay three discusses the role of financial intermediation in a monetary model. The household is given an endowment of raw capital goods not directly usable in production. They can acquire directly usable finished capital goods by contracting the use of a finished capital technology. These firms operate two period capital projects. The households write optimal contracts with these capital firms. It is shown that in equilibrium higher mean agency costs associated with finished capital good production lower output. Further, it is argued that the realizations of particular capital projects are not important in determining output. (Abstract shortened with permission of author.)

Degree

Ph.D.

Advisors

Hu, Purdue University.

Subject Area

Economics

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