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Endogenous Specialization and Factor Substitution in a Monetary Growth Model


  • Anne Jurkat
  • Rainer Klump


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.

Suggested Citation

  • Anne Jurkat & Rainer Klump, 2009. "Endogenous Specialization and Factor Substitution in a Monetary Growth Model," DEGIT Conference Papers c014_036, DEGIT, Dynamics, Economic Growth, and International Trade.
  • Handle: RePEc:deg:conpap:c014_036

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    References listed on IDEAS

    1. 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.
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    4. Abel, Andrew B., 1985. "Dynamic behavior of capital accumulation in a cash-in-advance model," Journal of Monetary Economics, Elsevier, vol. 16(1), pages 55-71, July.
    5. Hung, Fu-Sheng, 2003. "Inflation, financial development, and economic growth," International Review of Economics & Finance, Elsevier, vol. 12(1), pages 45-67.
    6. 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.
    7. Shi, Shouyong, 1999. "Search, inflation and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 44(1), pages 81-103, August.
    8. 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.
    9. 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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    11. Bruno, Michael & Easterly, William, 1998. "Inflation crises and long-run growth," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 3-26, February.
    12. Schreft, Stacey L. & Smith, Bruce D., 1997. "Money, Banking, and Capital Formation," Journal of Economic Theory, Elsevier, vol. 73(1), pages 157-182, March.
    13. 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.
    14. 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 969-975, October.
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    More about this item


    Monetary growth model; Inflation; Factor substitution; Cash-in-advance constraint; Endogenous specialization;

    JEL classification:

    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models


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