Money, Asset Markets and Efficiency of Capital Formation

Research output: Working paperDiscussion paperOther research output

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Abstract

Holdings of money and illiquid assets are likely to be determined jointly. Therefore, frictions that give rise to a need for money may affect capital formation, resulting in either too much or too little investment. Existing models of money and capital however tend to overlook that both types of investment inefficiencies can be equilibrium outcomes. Building upon insights from the New-Monetarist literature, we construct a model in which preference heterogeneity between agents implies that both over- and under-investment can arise. We use our framework to study whether monetary policy can effectively resolve both types of investment inefficiencies, and find that increasing inflation could resolve under-investment inefficiencies while reducing inflation could curb over-investment inefficiencies.
Original languageEnglish
Place of PublicationTilburg
PublisherCentER, Center for Economic Research
Number of pages49
Volume2019-002
Publication statusPublished - 15 Jan 2019

Publication series

NameCentER Discussion Paper
Volume2019-002

Fingerprint

Asset markets
Capital formation
Inefficiency
Inflation
Overinvestment
Underinvestment
Friction
Assets
Monetary policy
Preference heterogeneity

Keywords

  • optiam monetary policy
  • asses markets
  • under-investment
  • over-investment

Cite this

van Buggenum, H., & Uras, B. (2019). Money, Asset Markets and Efficiency of Capital Formation. (CentER Discussion Paper; Vol. 2019-002). Tilburg: CentER, Center for Economic Research.
van Buggenum, Hugo ; Uras, Burak. / Money, Asset Markets and Efficiency of Capital Formation. Tilburg : CentER, Center for Economic Research, 2019. (CentER Discussion Paper).
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van Buggenum, H & Uras, B 2019 'Money, Asset Markets and Efficiency of Capital Formation' CentER Discussion Paper, vol. 2019-002, CentER, Center for Economic Research, Tilburg.

Money, Asset Markets and Efficiency of Capital Formation. / van Buggenum, Hugo; Uras, Burak.

Tilburg : CentER, Center for Economic Research, 2019. (CentER Discussion Paper; Vol. 2019-002).

Research output: Working paperDiscussion paperOther research output

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N2 - Holdings of money and illiquid assets are likely to be determined jointly. Therefore, frictions that give rise to a need for money may affect capital formation, resulting in either too much or too little investment. Existing models of money and capital however tend to overlook that both types of investment inefficiencies can be equilibrium outcomes. Building upon insights from the New-Monetarist literature, we construct a model in which preference heterogeneity between agents implies that both over- and under-investment can arise. We use our framework to study whether monetary policy can effectively resolve both types of investment inefficiencies, and find that increasing inflation could resolve under-investment inefficiencies while reducing inflation could curb over-investment inefficiencies.

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van Buggenum H, Uras B. Money, Asset Markets and Efficiency of Capital Formation. Tilburg: CentER, Center for Economic Research. 2019 Jan 15. (CentER Discussion Paper).