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Growth-Effects of Inflation Targeting: The Role of Financial Sector Development

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  • Rangan Gupta

    (University of Pretoria, Department of Economics)

Abstract

The paper develops a dynamic general equilibrium monetary endogenous growth model. The closed economy model is inhabited by consumers, firms, a Cournotian monopolistically competitive banking system, besides, an inflationtargeting monetary authority, and, in turn, analyzes the effect of a tight monetary (disinflationary) policy on growth. We show that the effect of a lower inflation target on growth is ambiguous, with the ultimate effect depending on the initial levels of growth and the individual bank size, besides, a whole host of structural parameters defining the preferences and the production structure of the economy.

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Bibliographic Info

Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 12 (2011)
Issue (Month): 1 (May)
Pages: 65-87

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Handle: RePEc:cuf:journl:y:2011:v:12:i:1:p:65-87

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Keywords: Inflation targeting; Economic growth; Financial sector development;

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  1. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 195-209, April.
  2. Rangan Gupta & Josine Uwilingiye, 2010. "Evaluating the Welfare Cost of Inflation in a Monetary Endogenous Growth General Equilibrium Model: The Case of South Africa," Working Papers, University of Pretoria, Department of Economics 201002, University of Pretoria, Department of Economics.
  3. Marco Vega & Diego Winkelried, 2005. "Inflation Targeting and Inflation Behavior: A Successful Story?," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 1(3), December.
  4. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 130, University of Rochester - Center for Economic Research (RCER).
  5. Arminio Fraga & Ilan Goldfajn & André Minella, 2003. "Inflation Targeting in Emerging Market Economies," Working Papers Series, Central Bank of Brazil, Research Department 76, Central Bank of Brazil, Research Department.
  6. WenShwo Fang & Stephen M. Miller & ChunShen Lee, 2009. "Inflation Targeting Evaluation: Short-run Costs and Long-run Irrelevance," Working Papers, University of Nevada, Las Vegas , Department of Economics 0920, University of Nevada, Las Vegas , Department of Economics.
  7. Marco A. Espinosa & Chong K. Yip, 1995. "Fiscal and monetary policy interactions in an endogenous growth model with financial intermediaries," Working Paper, Federal Reserve Bank of Atlanta 95-10, Federal Reserve Bank of Atlanta.
  8. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  9. WenShwo Fang & Stephen M. Miller, 2010. "The Lag in Effect of Inflation Targeting and Policy Evaluation," Working papers, University of Connecticut, Department of Economics 2010-01, University of Connecticut, Department of Economics.
  10. Marc Lavoie, 2006. "A Post-Keynesian Amendment To The New Consensus On Monetary Policy," Metroeconomica, Wiley Blackwell, Wiley Blackwell, vol. 57(2), pages 165-192, 05.
  11. Miguel A. LeÛn-Ledesma & A. P. Thirlwall, 2002. "The endogeneity of the natural rate of growth," Cambridge Journal of Economics, Oxford University Press, Oxford University Press, vol. 26(4), pages 441-459, July.
  12. V.V. Chari & Larry E. Jones & Rodolfo E. Manuelli, 1995. "The growth effects of monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Fall, pages 18-32.
  13. Nicholas Apergis & Stephen M. Miller & Alexandros Panethimitakis & Athanassios Vamvakidis, 2005. "Inflation Targeting and Output Growth: Evidence from Aggregate European Data," Working papers, University of Connecticut, Department of Economics 2005-06, University of Connecticut, Department of Economics.
  14. Mollick, André Varella & Cabral, René & Carneiro, Francisco G., 2011. "Does inflation targeting matter for output growth? Evidence from industrial and emerging economies," Journal of Policy Modeling, Elsevier, Elsevier, vol. 33(4), pages 537-551, July.
  15. Gilberto Libanio, 2005. ""Good governance" in monetary policy and the negative real effects of inflation targeting in developing economies," Textos para Discussão Cedeplar-UFMG td277, Cedeplar, Universidade Federal de Minas Gerais.
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Cited by:
  1. Mollick, André Varella & Cabral, René & Carneiro, Francisco G., 2011. "Does inflation targeting matter for output growth? Evidence from industrial and emerging economies," Journal of Policy Modeling, Elsevier, Elsevier, vol. 33(4), pages 537-551, July.
  2. Wang, Chan, 2012. "A very preliminary survey on growth and development," MPRA Paper 39037, University Library of Munich, Germany.

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