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2010/2 (Vol. 31)

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Pages 7 - 49 Next



We generalize the monetary economy with cash and credit goods pioneered by Lucas and Stokey (1983, 1987) to the case of a neoclassical production economy. Assuming a fairly general continuous time stochastic process for real capital returns, we show that money non-neutrality is generic, even though the money growth rate is i.i.d. and the representative agent’s utility is log separable. We also show that the capital to wealth ratio plays a key role in the transmission mechanism by which monetary policy affects the dynamics of all real variables, in particular those of the pricing kernel and of asset excess returns. We finally provide some empirical evidence that supports the hypothesized influence of the capital to wealth ratio on the US equity market premium.


  1. Introduction
  2. Asset Pricing in a Production vs. a Pure Exchange Economy
    1. The General Framework
    2. The Exchange Economy
    3. The Production Economy
  3. General Equilibrium of the Production Economy
    1. The Representative Agent’s Budget Constraint
    2. Constant returns to scale
    3. Non constant returns to scale
  4. Empirical Evidence
    1. Data
    2. The capital to wealth ratio
    3. Pure exchange and production economies
  5. Conclusion

To cite this article

Abraham Lioui, Patrice Poncet, “ Money and Asset Prices in a Production Economy* ”, Finance 2/2010 (Vol. 31) , p. 7-49
URL : www.cairn.info/revue-finance-2010-2-page-7.htm.

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