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Indeterminacy with constant money growth rules and income-based liquidity constraints

  • Bosi, Stefano
  • Dufourt, Frédéric

We study the implications of constant money growth rules on the stability properties of the equilibrium, in economies where the agents are subject to a partial cash-in-advance constraint applying simultaneously to consumption and investment purchases. By reference to similar models in which the liquidity constraint applies only to consumption, we show that the inclusion of investment has dramatic, but contrasting, effects on the range of values giving rise to indeterminacy. First, it increases strongly a lower bound on the share of purchases requiring cash, below which the steady state is always indeterminate. Second, it creates a higher bound on this share, above which the steady state is always determinate. In this context, the steady-state value of the velocity of money becomes a crucial parameter for gauging whether constant money growth rules may be stabilizing or destabilizing for the economy.

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Article provided by Elsevier in its journal Research in Economics.

Volume (Year): 62 (2008)
Issue (Month): 2 (June)
Pages: 57-63

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Handle: RePEc:eee:reecon:v:62:y:2008:i:2:p:57-63
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622941

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  1. Benhabib, Jess & Schmitt-Grohé, Stephanie & Uribe, Martín, 1999. "The Perils of Taylor Rules," CEPR Discussion Papers 2314, C.E.P.R. Discussion Papers.
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