Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/65812
Authors: 
Scheffel, Eric
Year of Publication: 
2008
Series/Report no.: 
Cardiff Economics Working Papers E2008/30
Abstract: 
Micro-founded de-centralized financial intermediation in a cash and costly-credit model(see Gillman and Kejak, 2008) results in a cost-distortion of returns implying a lower average nominal and real risk-free rate when compared to standard cash-in-advance RBC models. Failure of both short-run and long-run Fisher equation relationships based on observable real and nominal rates and inflation are obtained. The cost-distortion also leads to an unconditionally upward-sloping average yield curve of interest rates which is also convex in shape. The model is capable of producing a positive correlation between the nominal rate and velocity, and a negative correlation between the ex-post real rate and inflation. More importantly, the model also predicts a negative correlation between the ex-ante real rate and the ex-ante expected rate of inflation. Finally, the conditional spread between the usual CCAPM rate as defined by Canzoneri and Diba (2005) and the model-implied money market rate is positively correlated with the stance of monetary policy, offering a new perspective on this systematic link recently studied empirically by Canzoneri et al. (2007a) and theoretically by Canzoneri and Diba (2005).
Subjects: 
Business Cycles
Money
Term Structure of Interest Rates
JEL: 
E4
E44
Document Type: 
Working Paper

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