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Velocity of money, equilibrium (in)determinacy and endogenous growth

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  • Chen, Shu-Hua
  • Guo, Jang-Ting

Abstract

We show that in a canonical one-sector AK model of endogenous growth with a generalized cash-in-advance constraint, the growth and velocity effects of money are closely related to the local stability properties of the economy's balanced growth paths. When a positive fraction (excluding 100%) of gross investment is subject to the liquidity constraint, the economy displays saddle-path stability and negative effects of money on output growth and velocity due to a dominating portfolio substitution effect. By contrast, when the opposing intertemporal substitution effect dominates, the economy exhibits indeterminacy and sunspots, as well as a positive correlation between money, output growth and velocity. Finally, when real balances are required only for the household's consumption purchases, money becomes superneutral in the growth-rate and also in the velocity sense because the equilibrium real rate of return on capital remains constant.

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  • Chen, Shu-Hua & Guo, Jang-Ting, 2008. "Velocity of money, equilibrium (in)determinacy and endogenous growth," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 1085-1096, September.
  • Handle: RePEc:eee:jmacro:v:30:y:2008:i:3:p:1085-1096
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    References listed on IDEAS

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    Cited by:

    1. Been-Lon Chen & Yu-Shan Hsu & Chia-Hui Lu, 2011. "Friedman meets Becker and Mulligan in a monetary neoclassical growth model," Journal of Economics, Springer, vol. 104(2), pages 99-126, October.
    2. Maxime Menuet & Alexandru Minea & Patrick Villieu, 2015. "Deficit Rules and Monetization in a Growth Model with Multiplicity and Indeterminacy," Working Papers halshs-01199774, HAL.
    3. Seiya Fujisaki & Kazuo Mino, 2010. "Long-Run Impacts of Inflation Tax with Endogenous Capital Depreciation," Economics Bulletin, AccessEcon, vol. 30(1), pages 808-816.
    4. repec:ebl:ecbull:v:5:y:2008:i:13:p:1-7 is not listed on IDEAS
    5. repec:spr:joecth:v:65:y:2018:i:4:d:10.1007_s00199-017-1040-5 is not listed on IDEAS
    6. Seiya Fujisaki & Kazuo Mino, 2009. "Long-Run Impacts of Inflation Tax in the Presence of Multiple Capital Goods," Economics Bulletin, AccessEcon, vol. 29(3), pages 1644-1652.
    7. Been-Lon Chen & Mei Hsu & Chia-Hui Lu, 2007. "Status and Multiple Growth Regimes," IEAS Working Paper : academic research 07-A010, Institute of Economics, Academia Sinica, Taipei, Taiwan.
    8. Seiya Fujisaki & Kazuo Mino, 2010. "Growth and Distributional Effects of Inflation with Progressive Taxation," Economics Bulletin, AccessEcon, vol. 30(4), pages 3055-3065.
    9. Been‐Lon Chen & Shun‐Fa Lee, 2012. "Intersectoral Spillovers, Relative Prices and Development Traps," Review of Development Economics, Wiley Blackwell, vol. 16(2), pages 243-261, May.
    10. Maxime Menuet & Alexandru Minea & Patrick Villieu, 2018. "Deficit, monetization, and economic growth: a case for multiplicity and indeterminacy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 65(4), pages 819-853, June.
    11. Seiya Fujisaki, 2009. "Velocity and Monetary Expansion in a Growing Economy with Interest-Rate Control," Discussion Papers in Economics and Business 09-09, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    12. Seiya Fujisaki, 2008. "Equilibrium Determinacy of Endogenous Growth with Generalized Taylor Rule: A Discrete-Time Analysis," Discussion Papers in Economics and Business 08-21, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    13. Lai, Ching-Chong & Chin, Chi-Ting, 2013. "Monetary Rules And Endogenous Growth In An Open Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 17(02), pages 431-463, March.
    14. Kawagishi, Taketo & Kaminoyama, Ken-ichi, 2014. "Cash-in-advance constraint with status and endogenous growth," MPRA Paper 55946, University Library of Munich, Germany.

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