A BEJM Contributions article.

Abstract

Search-theory has become the main paradigm for the micro-foundation of money. But no comprehensive business cycle analysis has been undertaken yet with a search-based monetary model. This paper extends the model with divisible goods and divisible money of Shi (JET, 1998) to allow for capital formation, analyses the monetary propagation mechanism and contrasts the model's implications with US business cycle stylized facts. The propagation mechanism based on a feedback between increased search intensity and depleted inventories only survives in the presence of non-negligible capital adjustment costs. With intermediate adjustment costs the model is able to replicate fairly well the volatility and cross-correlation with output of key US time series, including sales and inventory investment.

Submitted: October 26, 2005 · Accepted: September 1, 2006 · Published: November 2, 2006

Originally published in Contributions to Macroeconomics.

Recommended Citation

Menner, Martin (2006) "A Search-Theoretic Monetary Business Cycle Model with Capital Formation," Contributions to Macroeconomics: Vol. 6 : Iss. 1, Article 11.
Available at: http://www.bepress.com/bejm/contributions/vol6/iss1/art11