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Poverty traps, the money growth rule, and the stage of financial development

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  • Gokan, Yoichi
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    Abstract

    This paper investigates how monetary policy influences the emergence of local indeterminacy, local bifurcations, and multiple steady states, depending upon the degree of the commitment parameter that defines financial market imperfection, using Diamond's overlapping generations model with credit market frictions. The analytical results will show that poverty traps happen as an inevitable outcome under a wider range of money growth rates, because financial markets are less developed. Put differently, we derive analytically the positive link between financial development and per capita income.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 35 (2011)
    Issue (Month): 8 (August)
    Pages: 1273-1287

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    Handle: RePEc:eee:dyncon:v:35:y:2011:i:8:p:1273-1287

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    Web page: http://www.elsevier.com/locate/jedc

    Related research

    Keywords: Poverty traps Monetary policy Financial development Indivisible investment Multiple steady states Local indeterminacy Neimark-Sacker and saddle-node bifurcations;

    References

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    1. Gokan, Yoichi, 2006. "Dynamic effects of government expenditure in a finance constrained economy," Journal of Economic Theory, Elsevier, vol. 127(1), pages 323-333, March.
    2. Kiminori Matsuyama, 2002. "Financial Market Globalization, Symmetry-Breaking, and Endogenous Inequality of Nations," CIRJE F-Series CIRJE-F-186, CIRJE, Faculty of Economics, University of Tokyo.
    3. Greenwood, Jeremy & Smith, Bruce D., 1997. "Financial markets in development, and the development of financial markets," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 145-181, January.
    4. Elisabeth Huybens & Bruce D. Smith, 1997. "Inflation, Financial Markets and Long-Run Real Activity," Working Papers 9707, Centro de Investigacion Economica, ITAM.
    5. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
    6. Bruce D. Smith & John H. Boyd, 1998. "Capital market imperfections in a monetary growth model," Economic Theory, Springer, vol. 11(2), pages 241-273.
    7. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
    8. Hicks, J. R., 1969. "A Theory of Economic History," OUP Catalogue, Oxford University Press, number 9780198811633, September.
    9. Gokan, Yoichi, 2008. "Alternative government financing and aggregate fluctuations driven by self-fulfilling expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 32(5), pages 1650-1679, May.
    10. Bencivenga, V.R. & Smith, B.D., 1988. "Financial Intermediation And Endogenous Growth," RCER Working Papers 124, University of Rochester - Center for Economic Research (RCER).
    11. Elisabeth Huybens & Bruce D. Smith, 1996. "Financial Market Frictions, Monetary Policy and Capital Accumulation in a Small Open Economy," Working Papers 9608, Centro de Investigacion Economica, ITAM.
    12. Atje, Raymond & Jovanovic, Boyan, 1993. "Stock markets and development," European Economic Review, Elsevier, vol. 37(2-3), pages 632-640, April.
    13. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
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