The name is absent

CAPACITY AND ASYMMETRIES IN MONETARY POLICY

Recall that the ratio of funds passing through the loan market to funds passing
through the goods market, defined in (3.7), can be expressed as a function of the
of labor to leisure ratio,

L_t
1-yJ (I-L_t)

Thus, the larger is the employment level, the larger is the corresponding ratio of
funds Γ_t. This implies that for a given rate of growth of money, x_t ≡ M_tJXt the
ratio D_t/M_t is also high since,

Dt+ Xt _ (DtJM_t) + x

M_t + X_t

But a high value of Γ_t implies a low value of (M_t — D_t) so that the change in the
pool of funds passing through the financial intermediary that are lent to firms

dΓ_t Mt — D_t
dx_t [M_t (1 + x_t)]²

will be low.

Next, it remains to be shown that in a high capacity utilization rate economy,
employment is higher that in a low capacity utilization rate. To do this, notice
that the capacity utilization rate, C_t, was defined in equation (3.4) as the ratio of
current output, y_t, to maximum output, l_t, that is,

Since in the short-run the maximum level of output is fixed, a high level of capac-
ity is obtained with a more intensive use of existing resources. This implies that
current output will be higher. But this can be achieved only with a higher level of
employment, since current output is given by

' f^υ , ,    „ _x≤=ι 1      , '

J (A_tXL_t) - ¾^edF(t>)

Altogether, in the short run, a high level of capacity utilization rate implies a high
level of employment, and thus the effect of the monetary shock on employment
will be lower. The impact on the other macro variables follows from applying the
results in the previous proposition.

Next, it is shown how final prices and output respond asymmetrically to the
unanticipated monetary policy shock. The result is illustrated in Chart 3 and the
argument is as follows: assume first that the economy is in the equilibrium point
(Y,P) and an unanticipated monetary policy shock takes place. The monetary
shock shifts the short-run supply curve to the right from SS to S^,S^,, since it re-
duces production costs by driving down the equilibrium rate of interest. Notice
that the supply curve is vertical at the maximum output level, Y*. The money
injection increases, at the same time, aggregate demand of the final good through
the household’s cash-in-advance constraint, from DD to D^,D^,. The new equilibrium
is reached at ( Y^,,P^,). If a new monetary injection occurs, the supply moves to S”S”
and demand to D”D”. The intersection of both curves determines the equilibrium
value of output and price level at (Y”,P”). The increase in prices will be higher

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