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Financial Deepening and Monetary Growth with Endogenous Liquidity Constraints

  • 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)

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.

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Article provided by College of Business, Feng Chia University, Taiwan in its journal Journal of Economics and Management.

Volume (Year): 9 (2013)
Issue (Month): 1 (January)
Pages: 1-12

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Handle: RePEc:jec:journl:v:9:y:2013:i:1:p:1-12
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  1. Robert E. Lucas, Jr. & Nancy L. Stokey, 1985. "Money and Interest in a Cash-in-Advance Economy," NBER Working Papers 1618, National Bureau of Economic Research, Inc.
  2. Pagano, Marco, 1993. "Financial markets and growth: An overview," European Economic Review, Elsevier, vol. 37(2-3), pages 613-622, April.
  3. 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.
  4. Gomme, P., 1993. "Money and Growth Revisited : Measuring the Costs of Inflation in an Endogenous Growth Model," Discussion Papers dp93-03, Department of Economics, Simon Fraser University.
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  6. 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.
  7. 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 607-25, December.
  8. Paul Gomme, 1991. "Money and growth revisited," Discussion Paper / Institute for Empirical Macroeconomics 55, Federal Reserve Bank of Minneapolis.
  9. Miles, David, 1992. "Housing markets, consumption and financial liberalisation in the major economies," European Economic Review, Elsevier, vol. 36(5), pages 1093-1127, June.
  10. Vaidyanathan, Geetha, 1993. "Consumption, liquidity constraints and economic development," Journal of Macroeconomics, Elsevier, vol. 15(3), pages 591-610.
  11. 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.
  12. 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.
  13. Palivos, Theodore & Wang, Ping & Zhang, Jianbo, 1993. "Velocity of money in a modified cash-in-advance economy: Theory and evidence," Journal of Macroeconomics, Elsevier, vol. 15(2), pages 225-248.
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