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Can growth-enhanced monetary policy improve welfare when people seek social status?

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  • Hsiu-Yun Lee
  • Yu-Lin Wang

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  • Wen-Ya Chang
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    Abstract

    This paper examines the growth and welfare effects from an increase in the rate of money supply in an Ak type growth model with a relative wealth-enhanced social status motive, production externalities, and liquidity constraints. When only consumption is constrained by liquidity, fast money supply can hasten output growth unless seigniorage revenue is wasted and production externalities do not exist. We find that even though money growth normally promotes economic growth, it does not improve welfare when capital stock is over-accumulated. In general, an optimal monetary policy minimizes seigniorage. Our results also conclude that the optimal monetary policy rarely follows the Friedman rule. Copyright Springer-Verlag Wien 2013

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    Bibliographic Info

    Article provided by Springer in its journal Journal of Economics.

    Volume (Year): 110 (2013)
    Issue (Month): 3 (November)
    Pages: 257-272

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    Handle: RePEc:kap:jeczfn:v:110:y:2013:i:3:p:257-272

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    Web page: http://www.springerlink.com/link.asp?id=108909

    Related research

    Keywords: Wealth-enhanced social status; Production externalities; Cash-in-advance constraint; Monetary policy; O42; E52;

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    References

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    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
    2. Theodore Palivos & Chong K. Yip, 1994. "Government expenditure financing in an endogenous growth model: a comparison," Working Paper 94-1, Federal Reserve Bank of Atlanta.
    3. Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
    4. Dotsey, Michael & Sarte, Pierre Daniel, 2000. "Inflation uncertainty and growth in a cash-in-advance economy," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 631-655, June.
    5. Jess Benhabib & Mark M. Spiegel, 2006. "Moderate inflation and the deflation-depression link," Working Paper Series 2006-32, Federal Reserve Bank of San Francisco.
    6. Heng-fu Zou, 1998. "The spirit of capitalism, social status, money, and accumulation," CEMA Working Papers 99, China Economics and Management Academy, Central University of Finance and Economics.
    7. Hung-Ju Chen & Jang-Ting Guo, 2009. "Social Status And The Growth Effect Of Money," The Japanese Economic Review, Japanese Economic Association, vol. 60(1), pages 133-141.
    8. Chang, Wen-ya & Hsieh, Yi-ni & Lai, Ching-chong, 2000. "Social status, inflation, and endogenous growth in a cash-in-advance economy," European Journal of Political Economy, Elsevier, vol. 16(3), pages 535-545, September.
    9. Ahmed, Shaghil & Rogers, John H., 2000. "Inflation and the great ratios: Long term evidence from the U.S," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 3-35, February.
    10. Sergio Rebelo, 1999. "Long Run Policy Analysis and Long Run Growth," Levine's Working Paper Archive 2114, David K. Levine.
    11. Pelloni, Alessandra & Waldmann, Robert, 2000. "Can waste improve welfare?," Journal of Public Economics, Elsevier, vol. 77(1), pages 45-79, July.
    12. Jang-Ting Guo & Shu-Hua Chen, 2008. "On the growth and velocity effects of money," Economics Bulletin, AccessEcon, vol. 5(13), pages 1-7.
    13. repec:ebl:ecbull:v:5:y:2008:i:13:p:1-7 is not listed on IDEAS
    14. Robert E. Lucas, Jr., 2000. "Inflation and Welfare," Econometrica, Econometric Society, vol. 68(2), pages 247-274, March.
    15. Wen-ya Chang, 2006. "Relative Wealth, Consumption Taxation, and Economic Growth," Journal of Economics, Springer, vol. 88(2), pages 103-129, 08.
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