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Endogenous Specialization and Factor Substitution in a Monetary Growth Model

  • Anne Jurkat
  • Rainer Klump
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    We study the effects of monetary policy on the choice of production technology and specialization. The level of output specialization is represented by the elasticity of substitution between capital and labor within a CES production function. A higher degree of specialization increases trading costs but also improves productivity. Money is introduced via a cash-in-advance constraint on consumption and specialization. Agents having access to a menu of production functions differing in the elasticity of substitution choose the optimal degree of specialization along with real money balances. Depending on the stage of development as measured by the initial degree of specialization both a Tobin and a reverse-Tobin effect can occur.

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    Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c014_036.

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    Length: 24 pages
    Date of creation: Jun 2009
    Date of revision:
    Handle: RePEc:deg:conpap:c014_036
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    1. Stacey L. Schreft & Bruce D. Smith, 1994. "Money, banking, and capital formation," Working Paper 94-05, Federal Reserve Bank of Richmond.
    2. Burdekin, Richard C.K. & Denzau, Arthur T. & Keil, Manfred W. & Sitthiyot, Thitithep & Willett, Thomas D., 2004. "When does inflation hurt economic growth? Different nonlinearities for different economies," Journal of Macroeconomics, Elsevier, vol. 26(3), pages 519-532, September.
    3. Hung, Fu-Sheng, 2003. "Inflation, financial development, and economic growth," International Review of Economics & Finance, Elsevier, vol. 12(1), pages 45-67.
    4. Bruno, Michael & Easterly, William, 1995. "Inflation crises and long-run growth," Policy Research Working Paper Series 1517, The World Bank.
    5. V. V. Chari & Larry E. Jones & Rodolfo E. Manuelli, 1995. "The growth effects of monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 18-32.
    6. Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 271-291, March.
    7. Shi, Shouyong, 1999. "Search, inflation and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 81-103, August.
    8. Huybens, Elisabeth & Smith, Bruce D., 1999. "Inflation, financial markets and long-run real activity," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 283-315, April.
    9. Rainer Klump & Peter McAdam & Alpo Willman, 2007. "Factor Substitution and Factor-Augmenting Technical Progress in the United States: A Normalized Supply-Side System Approach," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 183-192, February.
    10. Saam, Marianne, 2008. "Openness to trade as a determinant of the macroeconomic elasticity of substitution," Journal of Macroeconomics, Elsevier, vol. 30(2), pages 691-702, June.
    11. Andrew B. Abel, 1985. "Dynamic Behavior of Capital Accumulation in a Cash-in-Advance Model," NBER Working Papers 1549, National Bureau of Economic Research, Inc.
    12. Olivier de La Grandville & Rainer Klump, 2000. "Economic Growth and the Elasticity of Substitution: Two Theorems and Some Suggestions," American Economic Review, American Economic Association, vol. 90(1), pages 282-291, March.
    13. Ghossoub, Edgar A & Reed, Robert R, 2005. "Money and Specialization in a Neoclassical Growth Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 969-75, October.
    14. 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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