Anticipated inflation and capital in a multisector monetary economy

An infinite commodity, deterministic, multisector, monetary economy characterized by spatial separation, limited commitment, limited communication, and limited financial structure is described. The demography of the economy follows Townsend (1987), although the economic primitives of technology and endowment are distinct. Some investment projects are subjected to equilibrium liquidity constraints opening up an "investment Channel" for distortionary monetary policies. We show that the ratio of the pareto-optimal capital stocks to the competitive equilibrium capital stocks is decreasing in the inflation rate, and that this ratio decreases more rapidly for liquidity constrained capital goods. We present an example economy and calibrate the economy using parameter settings in Cooley and Hansen (1989, 1991a). We show that the investment channel can produce comparable welfare losses to the labor-leisure channel of Cooley and Hansen. We also show that the model of Stockman (1981), where all investment goods are liquidity constrained, estimates the effects of moderate inflation to be fifty percent greater than Cooley and Hansen.