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

  • Chen, Shu-Hua
  • Guo, Jang-Ting

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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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 30 (2008)
Issue (Month): 3 (September)
Pages: 1085-1096

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Handle: RePEc:eee:jmacro:v:30:y:2008:i:3:p:1085-1096
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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  8. Palivos, Theodore & Wang, Ping & Zhang, Jianbo, 1993. "Velocity of money in a modified cash-in-advance economy: Theory and evidence," Journal of Macroeconomics, Elsevier, vol. 15(2), pages 225-248.
  9. Wang, P. & Palivos, T., 1991. "Money, Output, and Income Velocity," Papers 10-91-7, Pennsylvania State - Department of Economics.
  10. Suen, Ming-Hon & Yip, Chong K., 2005. "Superneutrality, indeterminacy and endogenous growth," Journal of Macroeconomics, Elsevier, vol. 27(4), pages 579-595, December.
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  13. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
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