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Show me the money : retained earnings and the real effects of monetary shocks

Published online by Cambridge University Press:  17 August 2016

Matthias Doepke
Matthias Doepke*
Affiliation:
UCLA and CEPR
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Summary

The empirical literature on monetary policy shocks documents that contractionary shocks are followed by a persistent rise in interest rates and a persistent fall in output. Standard monetary business cycle models can account for the initial effects of monetary shocks, but have difficulty generating persistence. In this paper, I examine whether frictions that affect the asset allocation decisions of households can lead to persistent effects. In the model economy, households hold two assets, one used for transactions (the checking account) and one used for investment (the savings account). There is a small transaction cost for moving funds between the accounts. Another key feature of the economy is that the business sector accumulates retained earnings and credits profits to the consumers only with a delay. I show that in this environment monetary shocks have persistent effects even when the adjustment cost is very small.

Résumé

Résumé

La littérature empirique sur les chocs de politique monétaire nous informe que des chocs restrictifs sont suivis d'une hausse persistante des taux d'intérêt et d'une diminution persistante de la production. Les modèles monétaires standards de cycle peuvent expliquer les effets directs des chocs monétaires, mais ont des difficultés à reproduire la persistance de ceux-ci. Dans cet article, j'examine si les frictions qui affectent les décisions des ménages d'allocation des ressources peuvent mener à des effets persistants. Dans le modèle, les ménages détiennent deux actifs. L'un est utilisé à des fins de transaction (le compte à vue) et l'autre à des fins d'investissement (le carnet d'épargne). Il existe un faible coût de transaction pour transférer des fonds entre les actifs. Le fait que les entreprises accumulent des bénéfices non distribués et reversent les profits aux consommateurs avec un certain délai constitue également un facteur clé du modèle. Je montre que dans cet environnement, des chocs monétaires peuvent avoir des effets persistants même si le coût d'ajustement est très faible.

Keywords

Monetary shockspersistenceretained earningsE32E40E52chocs monétairespersistancebénéfices non distribuésE32E40E52
Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 71 , Issue 1 , 2005 , pp. 5 - 34
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 2005 

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Footnotes

(*)

I thank two anonymous referees and seminar participants at the University of Chicago and Universitat Hamburg for helpful discussions and comments. Financial support by the National Science Foundation and the UCLA Academic Senate is gratefully acknowledged. Address: Department of Economics, UCLA, 405 Hilgard Ave, Los Angeles, CA 90095. E-mail: doepke@econ.ucla.edu.

References

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