K-P argue that this can be handled by thinking of monetary services as a intermediate good that is complementary with real economic activity. The resulting model provides an interesting and fairly unique example of money supply endogeneity. Transactions services economize on time and other resources needed to exchange goods. , where k is the amount of capital, n is the amount of labor, and d is transactions services. Production is CRS, all inputs have standard properties, and the shocks to the production technology both have expected values of 1. Labor, capital, and transaction services prices given by w, q, and r .
Banks pass their return along to depositors, minus service fee.
Real currency demand decreases as the nominal interest rate rises, and increases as the price of financial services and the opportunity cost of time rise. Second, a correlation between output and base money is not predicted, but not impossible either depending on the central bank s feed-back rule. The endogeneity emphasized by K-P is quite different from almost anyone else's. Consider the case where there are no reserve requirements. The real supply of deposits r d depends entirely on the real economy.