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Endogenous Fluctuations in an Endogenous Growth Model with Inflation Targeting

Author

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  • Rangan Gupta

    (Department of Economics, University of Pretoria)

  • Lardo Stander

    (Department of Economics, University of Pretoria)

Abstract

This paper develops a monetary endogenous growth overlapping generations model characterized by production lags - specifically lagged capital inputs - and an inflation targeting monetary authority, and analyses the growth dynamics that emerge from this framework. The growth process is endogenized by allowing productive government expenditure on infrastructure, complementing the lagged private capital input. Following the extant literature, money is introduced by imposing a cash reserve requirement on an otherwise competitive banking sector. Given this framework, we show that multiple equilibria emerge along different growth paths, with the low-growth (high-growth) equilibrium being unstable (stable) and locally determinate (locally indeterminate). In addition, we show that convergent or divergent endogenous fl uctuations and even topological chaos could emerge around the high-growth equilibrium in the growth path where the monetary authority follows a high inflation targeting regime. Conversely, when the monetary authority follows a low inflation targeting regime, oscillations do not occur around either the low-growth or high-growth equilibrium.

Suggested Citation

  • Rangan Gupta & Lardo Stander, 2014. "Endogenous Fluctuations in an Endogenous Growth Model with Inflation Targeting," Working Papers 201432, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:201432
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    More about this item

    Keywords

    Endogenous fl uctuations; in flation targeting; chaos; production lags; indeterminacy;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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