INVESTMENT AND THE NOMINAL INTEREST RATE: THE VARIABLE VELOCITY CASE

Models treating money either as a consumer good or as a producer good are encompassed by a model in which both households and firms use money as a buffer between receipts and expenditures. A rise in nominal interest rates increases resources devoted to intermediation, while discouraging purchases fi...

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Bibliographic Details
Published in:Economic inquiry 1989-04, Vol.27 (2), p.325-344
Main Author: KOENIG, EVAN F.
Format: Article
Language:English
Subjects:
Consumption
Economic models
Economic theory
Expenditures
Households
Interest rates
Investment policy
Investments
Mathematical analysis
Money
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Summary:Models treating money either as a consumer good or as a producer good are encompassed by a model in which both households and firms use money as a buffer between receipts and expenditures. A rise in nominal interest rates increases resources devoted to intermediation, while discouraging purchases financed from accumulated cash. If investment is financed from contemporaneous earnings, there is a tendency to substitute out of consumption and into investment when interest rates are high. Greater resources devoted to intermediation generate a negative wealth effect. The net impact on investment is ambiguous.
ISSN:0095-2583
1465-7295
DOI:10.1111/j.1465-7295.1989.tb00785.x