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Financial Deepening and Monetary Growth with Endogenous Liquidity Constraints

Author

Listed:
  • Ming-fu Shaw

    (Department of Economics, National Cheng Chi University, Taiwan)

  • Ching-chong Lai

    (Institute of Economics, Academia Sinica, Taiwan Department of Economics, National Cheng Chi University, Taiwan Department of Economics, Feng Chia University, Taiwan)

Abstract

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.

Suggested Citation

  • Ming-fu Shaw & Ching-chong Lai, 2013. "Financial Deepening and Monetary Growth with Endogenous Liquidity Constraints," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 9(1), pages 1-12, January.
    • Handle: RePEc:jec:journl:v:9:y:2013:i:1:p:1-12
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    endogenous liquidity constraints; financial deepening; endogenous growth;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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