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.

This paper investigates the impact of anticipated inflation on features of the business cycle in the presence of recursive but intertemporally dependent tastes. Intertemporal dependence is induced by the presence of a variable or endogenous individual rate of time preference. Quantitative experiments indicate that variability in the rate of time preference can enhance the contribution of monetary shocks to the fluctuations of real variables. Another implication of the variable-time-preference model is that, unlike the fixed time preference model, the business cycle features in high inflation and low inflation economies can be very different. The contribution of monetary shocks to fluctuations increases partly because endogenous time preference accentuates inflation-tax effects, which are already present in the standard framework because of the presence of cash-in-advance constraints. The change in the relative role of monetary shocks is also related to how variable time preference alters the effects of technology shocks, which can be quantitatively or qualitatively different in comparison to the standard model, depending on the parameters of the model.