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Indeterminacy with constant money growth rules and income-based liquidity constraints

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  • Bosi, Stefano
  • Dufourt, Frédéric

Abstract

We study the implications of constant money growth rules on the stability properties of the equilibrium, in economies where the agents are subject to a partial cash-in-advance constraint applying simultaneously to consumption and investment purchases. By reference to similar models in which the liquidity constraint applies only to consumption, we show that the inclusion of investment has dramatic, but contrasting, effects on the range of values giving rise to indeterminacy. First, it increases strongly a lower bound on the share of purchases requiring cash, below which the steady state is always indeterminate. Second, it creates a higher bound on this share, above which the steady state is always determinate. In this context, the steady-state value of the velocity of money becomes a crucial parameter for gauging whether constant money growth rules may be stabilizing or destabilizing for the economy.

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Bibliographic Info

Article provided by Elsevier in its journal Research in Economics.

Volume (Year): 62 (2008)
Issue (Month): 2 (June)
Pages: 57-63

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Handle: RePEc:eee:reecon:v:62:y:2008:i:2:p:57-63

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Web page: http://www.elsevier.com/locate/inca/622941

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  1. Abel, Andrew B., 1985. "Dynamic behavior of capital accumulation in a cash-in-advance model," Journal of Monetary Economics, Elsevier, vol. 16(1), pages 55-71, July.
  2. Benhabib, Jess & Schmitt-Grohé, Stephanie & Uribe, Martín, 1999. "The Perils of Taylor Rules," CEPR Discussion Papers 2314, C.E.P.R. Discussion Papers.
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  7. Calvo, Guillermo A, 1979. "On Models of Money and Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(1), pages 83-103, February.
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  9. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 2000. "Investment-Cash Flow Sensitivities Are Useful: A Comment On Kaplan And Zingales," The Quarterly Journal of Economics, MIT Press, vol. 115(2), pages 695-705, May.
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  11. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
  12. Charles T. Carlstrom & Timothy S. Fuerst, 2003. "Money Growth Rules and Price Level Determinacy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(2), pages 263-275, April.
  13. Bosi, Stefano & Magris, Francesco, 2003. "Indeterminacy and endogenous fluctuations with arbitrarily small liquidity constraint," Research in Economics, Elsevier, vol. 57(1), pages 39-51, March.
  14. Parent, Antoine & Rault, Christophe, 2004. "The Influences Affecting French Assets Abroad Prior to 1914," The Journal of Economic History, Cambridge University Press, vol. 64(02), pages 328-362, June.
  15. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
  16. Matsuyama, Kiminori, 1990. "Sunspot equilibria (rational bubbles) in a model of money-in-the-utility-function," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 137-144, January.
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Cited by:
  1. Barbar, Riham & Bosi, Stefano, 2010. "Collaterals and macroeconomic volatility," Research in Economics, Elsevier, vol. 64(3), pages 146-161, September.

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