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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
    1. Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
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    3. Lucas, Robert E, Jr & Stokey, Nancy L, 1987. "Money and Interest in a Cash-in-Advance Economy," Econometrica, Econometric Society, vol. 55(3), pages 491-513, May.
    4. Mino, Kazuo, 1997. "Long-Run Effects of Monetary Expansion in a Two-Sector Model of Endogenous Growth," Journal of Macroeconomics, Elsevier, vol. 19(4), pages 635-655, October.
    5. Pagano, Marco, 1993. "Financial markets and growth: An overview," European Economic Review, Elsevier, vol. 37(2-3), pages 613-622, April.
    6. Futagami, Koichi & Morita, Yuichi & Shibata, Akihisa, 1993. " Dynamic Analysis of an Endogenous Growth Model with Public Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(4), pages 607-625, December.
    7. Marquis, Milton H. & Reffett, Kevin L., 1991. "Real interest rates and endogenous growth in a monetary economy," Economics Letters, Elsevier, vol. 37(2), pages 105-109, October.
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    11. Gomme, Paul, 1993. "Money and growth revisited : Measuring the costs of inflation in an endogenous growth model," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 51-77, August.
    12. Gomme, Paul, 1993. "Money and growth revisited : Measuring the costs of inflation in an endogenous growth model," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 51-77, August.
    13. Chang, Wen-ya & Hsieh, Yi-ni & Lai, Ching-chong, 2000. "Social status, inflation, and endogenous growth in a cash-in-advance economy," European Journal of Political Economy, Elsevier, vol. 16(3), pages 535-545, September.
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    More about this item

    Keywords

    endogenous liquidity constraints; financial deepening; endogenous growth;

    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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