The monetary transmission mechanism in a general equilibrium version of the baumol-tobin model

Abstract

The paper analyzes the effects of financial shocks on an economy in which individuals hold money to make purchases and in which the frequency of conversions of other assets into money is endogenous. The paper thus extends the work of Sanford Grossman and Laurence Weiss (1983) and Julio Rotemberg (1984) by allowing agents to choose the timing of trips to the bank. There are two major conclusions. First, the economy's response to a nominal interest rate shock exhibits large cycles. Second, the economy's response differs dramatically, both qualitatively and quantitatively, from its response when the timing of trips is fixed.