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Growth-Effects of Inflation Targeting: The Role of Financial Sector Development

  • Rangan Gupta

    (University of Pretoria, Department of Economics)

The paper develops a dynamic general equilibrium monetary endogenous growth model. The closed economy model is inhabited by consumers, firms, a Cournotian monopolistically competitive banking system, besides, an inflationtargeting monetary authority, and, in turn, analyzes the effect of a tight monetary (disinflationary) policy on growth. We show that the effect of a lower inflation target on growth is ambiguous, with the ultimate effect depending on the initial levels of growth and the individual bank size, besides, a whole host of structural parameters defining the preferences and the production structure of the economy.

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Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 12 (2011)
Issue (Month): 1 (May)
Pages: 65-87

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Handle: RePEc:cuf:journl:y:2011:v:12:i:1:p:65-87
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  1. V.V. Chari & Larry E. Jones & Rodolfo E. Manuelli, 1995. "The growth effects of monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 18-32.
  2. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 195-209, April.
  3. Marco Vega & Diego Winkelried, 2005. "Inflation Targeting and Inflation Behavior: A Successful Story?," International Journal of Central Banking, International Journal of Central Banking, vol. 1(3), December.
  4. Nicholas Apergis & Stephen M. Miller & Alexandros Panethimitakis & Athanassios Vamvakidis, 2005. "Inflation Targeting and Output Growth: Evidence from Aggregate European Data," Working papers 2005-06, University of Connecticut, Department of Economics.
  5. Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
  6. Varella Mollick, Andre & Torres, Rene Cabral & Carneiro, Francisco G., 2008. "Does Inflation Targeting Matter for Output Growth? Evidence from Industrial and Emerging Economies," Policy Research Working Paper Series 4791, The World Bank.
  7. Gilberto Libanio, 2005. ""Good governance" in monetary policy and the negative real effects of inflation targeting in developing economies," Textos para Discussão Cedeplar-UFMG td277, Cedeplar, Universidade Federal de Minas Gerais.
  8. Arminio Fraga & Ilan Goldfajn & André Minella, 2003. "Inflation Targeting in Emerging Market Economies," Working Papers Series 76, Central Bank of Brazil, Research Department.
  9. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  10. Rangan Gupta & Josine Uwilingiye, 2010. "Evaluating the Welfare Cost of Inflation in a Monetary Endogenous Growth General Equilibrium Model: The Case of South Africa," Working Papers 201002, University of Pretoria, Department of Economics.
  11. Miguel A. León-Ledesma & A. P. Thirlwall, 1998. "The Endogeneity of the Natural Rate of Growth," Studies in Economics 9821, School of Economics, University of Kent.
  12. WenShwo Fang & Stephen M. Miller & ChunShen Lee, 2009. "Inflation Targeting Evaluation: Short-run Costs and Long-run Irrelevance," Working Papers 0920, University of Nevada, Las Vegas , Department of Economics.
  13. Marco Espinosa & Chong K. Yip, 1998. "Fiscal and Monetary Policy Interactions in an Endogenous Growth Model with Financial Intermediaries," Departmental Working Papers _094, Chinese University of Hong Kong, Department of Economics.
  14. Marc Lavoie, 2006. "A Post-Keynesian Amendment To The New Consensus On Monetary Policy," Metroeconomica, Wiley Blackwell, vol. 57(2), pages 165-192, 05.
  15. WenShwo Fang & Stephen Miller, 2011. "The lag in effect of inflation targeting and policy evaluation," Applied Economics Letters, Taylor & Francis Journals, vol. 18(14), pages 1371-1375.
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