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CAPACITY AND ASYMMETRIES IN MONETARY POLICY

13


expected value. Notice that it is possible to write the gross nominal interest rate
as

.      ,.       ⅛- + At

(2-37)                 1 + ¾d =---^r----r

l'

so that a positive money shock (injected through the loan market) reduces the
value of money in the loan market. As a result, At is negative and would reduce
the nominal interest rate. This effect is compensated by the anticipated inflation
effect. Fisherian fundamentals hold only on average, not period by period.

3. Qualitative Properties

In this section I explore some of the insights and qualitative implications, with
the corresponding intuition, that can be derived from the model economy presented
above. To that end, I first describe the equilibrium that characterizes the economy.
Next, I proceed with the analysis of the long run properties of the model, which
are derived from stationary equilibrium. This latter concept of equilibrium will be
the basis for the dynamic analysis that will be performed in the next section. I also
study the influences of the parameters on the stationary equilibrium. This section
ends with the implications of capacity utilization for the shape of the short-run
dynamics.

3.1. The Competitive Equilibrium. A competitive equilibrium for this model
can be defined in the usual way. Given the initial productive equipments
K0 and
A∩. the initial monetary growth rate
x0 with its corresponding stochastic process
(2.28), a competitive equilibrium for the model economy described above can be
stated as follows,

Definition 1 (Competitive Equilibrium). The general equilibrium of the econ-
omy during any period t >
 0 is determined by a stochastic process for prices
{Pt, Pt, Rf, Rf, Wt,t} θ a quantity vector {Kt, Xt,Ct,Dt,Lt, yt}^=0 and a pro-
portion affirms {F(υt)}Zo that result from the optimal choices (consistent with
the available information) of the central bank, the households and the firms. In a
competitive equilibrium these choices are required to be made under rational expec-
tations and consistent with the following market-clearing conditions:

yt = ct + Kt+1 -(1- δ)Kt + Φ

Lst=Lf

Wll.! = Dt + Xt

Mf = Mts

which represent the goods, labor, loans and money markets, respectively.

In the previous definition, the aggregate allocation and pricing functions depend
on the relevant state. In particular, deposits,
Dt, are a function of the information
set Ω0,t whereas all other price and allocation rules are elements of Ωι.t, where
Ωo,t and Ωχ,tare defined as above. Recall that financial intermediation is a cost-
less activity and, hence,
Rf = Rf. Moreover, at equilibrium, F (¾) represents the
proportion of firms that underuse their productive capacities (i.e., those for which
Vj,t ∈ [y, ¾]). The variable π (¾) weights this proportion of firms by the relative



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