Endogenous Fluctuations in an Endogenous Growth Model with Ination Targeting

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