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Business cycles, velocity and asset prices in a Wicksellian banking time economy

Scheffel, Eric M. 2010. Business cycles, velocity and asset prices in a Wicksellian banking time economy. PhD Thesis, Cardiff University.

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This thesis collects three interrelated pieces of theoretical work, which are connected to each other in the sense of being rooted in an analysis and examination of a specific type of monetary general equilibrium model which is of a cash-in-advance nature. All of the three contributions extend the usual quantity-theoretic cash-in-advance (CIA) constraint to a more general exchange constraint, in that they include the possibility of allowing the representative household to pay for the consumption good using a (self-)produced alternative means-of-exchange, costly credit. The first two pieces extend the cash costly-credit production-based monetary RBC framework to include habit persistence in consumption and adjustment costs to investment. Most of the stochastic dynamic analysis emphasizes the role of a goods-sector productivity structural shock on/t/, so the thesis focuses on telling a story of a "Wicksellian" Banking time economy, in which it is predominantly this shock alone - and its effect on the Wicksellian equilibrium real rate of interest - that is driving both real and nominal variables in the economy. The growth rate of money is assumed to be of deterministic "k-percent" Friedman-type nature, so as to allow a more focused analysis of the endogenous variation in the demand for money. While the first piece discusses how the chosen modeling framework can success fully account for some factually observed measures related to consumption-money velocity, the second piece uses a similar model setup, but instead discusses the conditional behaviour of key real and nominal variables over the business cycle. Money balances, real quantities, real and nominal rates, as well as (expected) inflation rate series move conditionally over a Solow residual-driven business cycle, so as to closely mimick some of the salient features of a stylized monetary business cycle. Noteably, the additional introduction of credit production shocks allow the artificial economy to closely mimick the breakdown of a stable money demand relationship which is such a pertinent feature of the U.S. monetary business cycle in post-1980 data. Finally, the third piece deviates marginally from the first two contributions in that it constitutes a discussion of a labour-only economy. Here, credit production is de-centralized and produced subject to a debt- (or collateral-) requirement. Specifically, the decentralized financial intermediary is assumed to retain an amount of short-term government debt equal in value to credit on it's balances sheet, which it eventually pays out as a dividend to the household, reimbursing the latter for the cost of credit. The money market rate (obtained on a one-period saving deposit) is generally lower than the usual intertemporal risk-free rate, where the difference is always equal to the banking wage bill, which varies endogenously over the business cycle. This model setup and the implied banking wage tax levied on short-term saving deposits can help to explain some of the unconditional as well as conditional behaviour of the low risk-free, the equity premium, and the unconditional shape of the term structure of interest rates.

Item Type: Thesis (PhD)
Status: Unpublished
Schools: Business (Including Economics)
ISBN: 9781303191183
Date of First Compliant Deposit: 30 March 2016
Last Modified: 03 Oct 2014 14:40

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