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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 30, No. 1, pp.133-157
ISSN: 1225-0279 (Print)
Print publication date 28 Feb 2017
Received 02 Jan 2017 Revised 02 Feb 2017 Accepted 02 Feb 2017

Money and Capital Adjustment: Revisiting the Role of Money for Production

Jae Eun Song
Jae Eun Song, Assistant Professor, Department of Economics, Dankook University, Yongin-si 16890, Republic of Korea, Tel: +82-31-8005-3389, Fax: +82-31-8021-7208 jesong@dankook.ac.kr

JEL Classification: E41, E44, G11

Abstract

This study presents a new monetarist model, in which monetary liquidity is essential for capital adjustment, to analyze the effects of money growth on the production side. Results from revisiting the classic issue of money and capital with this model highlight the role of the diminishing rate of technical substitution between money and capital in the adjustment. When the substitutability between money and capital is sufficiently high, the positive Tobin effect of inflation on the aggregate capital stock and output can dominate the negative price distorting effect of inflation. This case will likely occur when search frictions in the capital market are severe.

Keywords:

Money growth, Inflation, Capital stock, Market friction, Liquidity

Acknowledgments

This paper is a revision of a chapter in my dissertation at the University of Pennsylvania. I would like to thank Randall Wright, Kenneth Burdett, Guillaume Rocheteau, Young Sik Kim, Late Manjong Lee, Hyung Sun Choi, Yiting Li, Gabriele Camera, and two anonymous referees for their invaluable comments. This work was supported by the National Research Foundation of Korea Grant funded by the Korean Government (NRF-2015S1A3A2046715).

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