Indeterminacy with Constant Money Growth Rules and Income-Based Liquidity Constraints
AbstractWe study the implications of constant money growth rules on the stability properties of the equilibrium, in economies where 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 InfoPaper provided by Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne in its series Documents de recherche with number 05-22.
Length: 15 pages
Date of creation: 2005
Date of revision:
Cash-in-advance; indeterminacy; business cycles;
Other versions of this item:
- Bosi, Stefano & Dufourt, Frédéric, 2008. "Indeterminacy with constant money growth rules and income-based liquidity constraints," Research in Economics, Elsevier, vol. 62(2), pages 57-63, June.
- Stefano Bosi & Frederic Dufourt, 2008. "Indeterminacy with constant money growth rules and income-based liquidity constraints," Post-Print hal-00796231, HAL.
- D90 - Microeconomics - - Intertemporal Choice - - - General
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
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