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Money, liquidity, and the structure of production

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  • Hendrickson, Joshua R.
  • Salter, Alexander William

Abstract

We use a model in which media of exchange are essential to examine the role of liquidity and monetary policy on production and investment decisions in which time is an important element. Specifically, we consider the effects of monetary policy on the length of production time and entry and exit decisions for firms. We show that higher rates of inflation cause households to substitute away from money balances and increase the allocation of bonds in their portfolio thereby causing a decline in the real interest rate. The decline in the real interest rate causes the period of production to increase and the productivity thresholds for entry and exit to decline. This implies that when the real interest rate declines, prospective firms are more likely to enter the market and existing firms are more likely to stay in the market. Finally, we present reduced form empirical evidence consistent with the predictions of the model.

Suggested Citation

  • Hendrickson, Joshua R. & Salter, Alexander William, 2016. "Money, liquidity, and the structure of production," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 314-328.
    • Handle: RePEc:eee:dyncon:v:73:y:2016:i:c:p:314-328
    DOI: 10.1016/j.jedc.2016.10.001
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    Cited by:

    1. Joshua R. Hendrickson, 2017. "Interest rates and investment coordination failures," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 30(4), pages 493-515, December.
    2. Hendrickson, Joshua R. & Luther, William J., 2022. "Cash, crime, and cryptocurrencies," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 200-207.
    3. Nicolás Cachanosky, 2021. "Microfoundations and macroeconomics: 20 years," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 34(2), pages 279-288, June.
    4. Nicolás Cachanosky, 0. "Microfoundations and macroeconomics: 20 years," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 0, pages 1-10.
    5. Bryan P. Cutsinger, 2021. "Forced savings and political malinvestment: an application of steve horwitz’s microfoundations and macroeconomics," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 34(2), pages 311-322, June.
    6. Hendrickson, Joshua R., 2022. "Commodity money, free banking, and nominal income targeting: Lessons for monetary policy reform," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 462-477.
    7. William J. Luther, 2021. "Two paths forward for Austrian macroeconomics," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 34(2), pages 289-297, June.

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    More about this item

    Keywords

    Monetary policy; Optimal stopping times; Entry and exit;
    All these keywords.

    JEL classification:

    • E14 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Austrian; Evolutionary; Institutional
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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