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INVESTMENT AND THE NOMINAL INTEREST RATE: THE VARIABLE VELOCITY CASE
Author(s) -
KOENIG EVAN F.
Publication year - 1989
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1989.tb00785.x
Subject(s) - economics , intermediation , investment (military) , monetary economics , interest rate , consumption (sociology) , earnings , financial intermediary , nominal interest rate , retained earnings , cash , real interest rate , macroeconomics , finance , debt , sociology , politics , political science , law , social science
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.