Are Financial Variables Inputs in Delivered Production Functions? No

Abstract

Fischer's classic (1974) paper develops conditions under which it is appropriate to use money as an input in a 'delivered' production function. In this paper, we extend Fischer's model I (the Baumol-Tobin inventory approach) by incorporating credit into the analysis. Our investigation of the extended model brings out a very restrictive but necessary implicit assumption employed by Fischer to treat money as an input. Namely, that there exists a binding constraint on the use of money! A similar result holds for our more general model.