Capital trading, stock trading, and the inflation tax on equity

About this book

"In Capital Trading, Stock Trading, and the Inflation Tax on Equity, Chami, Cosimano, and Fullenkamp (2001) (hereafter, CCF) analyze a cash-in-advance model in which capital goods are explicitly traded. The authors show that there is more responsiveness of consumption and output to changes in the money supply than exists in the standard neoclassical growth models. This note demonstrates that this arises because CCF implicitly imposed an additional equilibrium restriction on the Cooley and Hansen (1989) model. This restriction can be imposed only if the Cooley and Hansen model is subject to real indeterminacy which occurs whenever the risk aversion coefficient (denoted by lambda in the CCF paper) exceeds 2"--Federal Reserve Bank of Richmond web site.