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Interpreting monetary stabilization in a growth model with credit goods production

Author

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  • S. Rao Aiyagari
  • Zvi Eckstein

Abstract

This paper is motivated by observations concerning the size of the banking sector and the growth rate of the economy before and after successful stabilizations of high inflations. The facts suggest that the relative size of the banking sector increases during a period of accelerating inflation and decreases immediately following a successful monetary stabilization. Furthermore, the GDP growth rate is lower during the high inflation period than after stabilization. The goal of this paper is to develop a monetary growth model which is qualitatively consistent with these observations. The model we use is a variant of the Lucas and Stokey (1987) model of cash and credit goods. The main innovation in our model is that while cash goods and credit goods are perfect substitutes in consumption we posit different technologies for their production. We show that the model's predictions on the impact of a permanent stabilization are consistent with the main real and monetary observations on high inflation countries.

Suggested Citation

  • S. Rao Aiyagari & Zvi Eckstein, 1995. "Interpreting monetary stabilization in a growth model with credit goods production," Working Papers 525, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmwp:525
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    Citations

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    Cited by:

    1. Barbar, Riham & Bosi, Stefano, 2010. "Collaterals and macroeconomic volatility," Research in Economics, Elsevier, vol. 64(3), pages 146-161, September.
    2. Dressler, Scott J. & Li, Victor E., 2009. "Inside money, credit, and investment," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 970-984, April.
    3. William B. English, 1996. "Inflation and financial sector size," Finance and Economics Discussion Series 96-16, Board of Governors of the Federal Reserve System (U.S.).
    4. S. Rao Aiyagari & R. Anton Braun & Zvi Eckstein, 1998. "Transaction Services, Inflation, and Welfare," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1274-1301, December.
    5. Victor E. Li & Chia-Ying Chang, 1998. "Money, credit, and the cyclical behavior of household investment," Working Papers 1998-017, Federal Reserve Bank of St. Louis.

    More about this item

    Keywords

    Economic stabilization;

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