Money and economic growth

The cash in advance and money in utility function models are used to examine whether the nature of fluctuations in economic activities and welfare in three interdependent economies are related to the stocks and growth rate of money. When the money is exogenously introduced in the form of cash in advance, it serves as a medium of exchange and the rate of return in real and nominal assets become equal. Idiosyncratic technological shocks generate fluctuations in the growth rates of capital, output, prices, money, consumption, investment, labour supply and lifetime utilities of households. When households have money endogenously in their utility functions, the stock of money in excess of that required for transactions causes inflation and reduces the amount of capital stock and output in these economies. Both CIA and MIU models support for a steady growth rate of money according to the growth rate of output. While the inflation targeting by manipulating the interest rates for macroeconomic stability is theoretically a prudent policy move, it is impossible for a central bank to eliminate business cycles that arise from shocks to production technology or to other structural features of an economy.