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Working Paper 1998-017A

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"Money Credit and the Cyclical Behavior of Household Investment"
by Victor E. Li, and Chia-Ying Chang

This paper focuses on a monetary explanation of two business cycle regularities: (i) business and household investment are positively correlated and procyclical and (ii) household investment tends to lead business investment. We construct a general equilibrium framework that explicitly incorporates a credit sector where real resources are employed in the production of costly household and business credit services. Financial intermediaries provide interest bearing accounts to households and loanable funds for credit producers. It is shown that liquidity effects from asymmetric monetary injections to the financial sector increase the availability of consumer and business credit services. The relative strength of these liquidity effects on business and household spending can provide a mechanism which captures both the direction and timing of their corresponding investments expenditures over the cycle. Furthermore, explaining these observations with a household credit channel also resolves some problematic predictions of existing liquidity effect models.

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Category > Monetary Policy/Macroeconomics