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The effects of monetary policy at different stages of economic development

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  • Reed, Robert R.
  • Ghossoub, Edgar A.

Abstract

The 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 Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 117 (2012)
Issue (Month): 1 ()
Pages: 138-141

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Handle: RePEc:eee:ecolet:v:117:y:2012:i:1:p:138-141

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

Related research

Keywords: Economic development; Financial development; Monetary policy; Inflation;

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  1. Robert J. Barro, 1995. "Inflation and Economic Growth," NBER Working Papers 5326, National Bureau of Economic Research, Inc.
  2. Shaghil Ahmed & John H. Rogers, 1998. "Inflation and the great ratios: long-term evidence from the U.S," International Finance Discussion Papers 628, Board of Governors of the Federal Reserve System (U.S.).
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