Money and Endogenous Growth in a Cash-in-Advance Model with Social Status

Motivated by the substantial increase of nominal money supply in the U.S. economy since late 2008, this paper examines the equilibrium growth effect of money/inflation within a standard one-sector AK model of endogenous growth with wealth-enhanced preferences for social status and the most generalized cash-in-advance constraint. We show that the sign for the correlation between money and output growth depends crucially on (i) the liquidity-constrained ratio of consumption to investment, and (ii) how the shadow price of physical capital responds to a change in the monetary growth rate. This money-growth correlation, as well as the growth effect of social status, turns out to be closely related to the local stability properties of the economy's balanced growth path(s).