A quantitative dynamic general equilibrium monetary business cycle (MBC) model is developed that includes full-blown financial intermediation (intermediation between firms and households and among households), cash goods and credit goods (see Lucas and Stokey 1983), borrowing constraints for firms and households and standard cash-in-advance constraints. Households borrow to purchase credit goods and firms to finance factor payments. The model is used to answer the following question. Does the introduction of full-blown financial intermediation, in a quantitative MBC model, alter the estimated contribution of monetary policy shocks to business cycle fluctuations? The model is calibrated to post-Korean War U.S. aggregate data for the periods 1954: I-1991: IV and 1954: I-2001: IV, solved using the method of linear-quadratic approximation and simulation results compared with results for Cooley and Hansen (1995) model and summary statistics for the U.S. data. Monetary non-neutralities, in the model, occur through distortions in financial intermediation caused by the inflation tax. Costly credit goods, however, serve to reverse the substitution of credit goods for cash goods found in more simplistic models by reducing consumption of both goods with a larger decrease in credit goods. Simulation results show that full-blown financial intermediation is important for business cycles as the model better matches the U.S. data on several dimensions.
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