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Monetary Aggregates, Financial Intermediate And The Business Cycle

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Executive Summary

This paper explains and evaluates the transmissions and effectiveness of monetary policy shock in a simple Cash-In-Advance (CIA) economy with financial intermediates. Lucas-Fuerst's (1992) limited participation CIA models are able to explain decreasing nominal interest rates and increasing real economic activity with monetary expansion through limited participation monetary shock and the cost channel of monetary policy. Calvo's (1983) sticky price monetary model examines the real effects of money injections through firms' price setting behaviour, but it fails to generate a negative correlation between nominal interest rates and money growth rate, which has been observed in the data.

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