The effects of monetary policy at different stages of economic development
AbstractThe effects of monetary policy vary significantly across countries. In particular, recent empirical work finds evidence of a Tobin effect in high income countries and a reverse Tobin effect in less developed economies. We present a neoclassical growth model where money is required for investment and consumption purposes. In contrast to standard cash-in-advance models, the reliance on cash is inversely related to the extent of capital formation. In this setting, we demonstrate that the effects of monetary policy depend on the level of development. In particular, inflation adversely affects capital formation at low levels of income because there is a high reliance on cash and a high cost of capital. By comparison, the financial system operates more efficiently in advanced countries. Consequently, monetary policy generates a Tobin effect.
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Bibliographic InfoArticle provided by Elsevier in its journal Economics Letters.
Volume (Year): 117 (2012)
Issue (Month): 1 ()
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Economic development; Financial development; Monetary policy; Inflation;
Find related papers by JEL classification:
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- O42 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models
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