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Short-Term Credit: A Monetary Channel Linking Finance to Growth

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Author Info
Carolyn Sissoko () (Department of Economics, Occidental College)

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Abstract

This paper develops a mechanism that links the combined monetary and financial role of intermediaries to the division of labor and endogenous growth. The model builds on an augmented Ramsey Cass Koopmans (RCK) model of optimal growth. First, by relaxing the assumption that each agent buys and sells at the same time an endogenous cash-in-advance constraint is created. The cash constraint is not binding for agents who borrow from intermediaries at the start of a period and repay the debt at the end of the period. Thus intermediated short-term credit is a solution to the monetary friction. Second to address the division of labor the symmetric n-good n-type structure of Kiyotaki and Wright's search model of money is nested into each period of the model. Because each type of agent is more productive when his production is specialized, relaxing the cash constraint leads to a division of labor. Finally the exogenous growth of the RCK model is reinterpreted as endogenous growth due to a process of learning-by-doing. We find that financial intermediaries by relaxing the cash constraint promote the division of labor which generates a process of endogenous growth.

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File URL: http://departments.oxy.edu/economics/papers/growth.pdf
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Publisher Info
Paper provided by Occidental College, Department of Economics in its series Occidental Economics Working Papers with number 8.

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Length: 43 pages
Date of creation: Aug 2002
Date of revision: Jun 2006
Handle: RePEc:occ:wpaper:8

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Find related papers by JEL classification:
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
O3 - Economic Development, Technological Change, and Growth - - Technological Change
O4 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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