Financial Deepening and Monetary Growth with Endogenous Liquidity Constraints
This paper sets up a monetary growth model with an endogenous liquidity constraint on consumption, and uses it to analyze the economy's long-run response to money growth. We find that a rise in the rate of money growth will increase the consumer's financial deepening, thereby leading to a reduction in the liquidity constraint on consumption and a rise in the consumption-capital ratio. With such an adjustment, the representative household can borrow more and raise its consumption. As a consequence, a rise in the rate of money growth will deter the savings rate and the economic growth rate.
Volume (Year): 9 (2013)
Issue (Month): 1 (January)
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