Velocity of money, equilibrium (in)determinacy and endogenous growth
We show that in a canonical one-sector AK model of endogenous growth with a generalized cash-in-advance constraint, the growth and velocity effects of money are closely related to the local stability properties of the economy's balanced growth paths. When a positive fraction (excluding 100%) of gross investment is subject to the liquidity constraint, the economy displays saddle-path stability and negative effects of money on output growth and velocity due to a dominating portfolio substitution effect. By contrast, when the opposing intertemporal substitution effect dominates, the economy exhibits indeterminacy and sunspots, as well as a positive correlation between money, output growth and velocity. Finally, when real balances are required only for the household's consumption purchases, money becomes superneutral in the growth-rate and also in the velocity sense because the equilibrium real rate of return on capital remains constant.
Year of publication: |
2008
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Authors: | Chen, Shu-Hua ; Guo, Jang-Ting |
Published in: |
Journal of Macroeconomics. - Elsevier, ISSN 0164-0704. - Vol. 30.2008, 3, p. 1085-1096
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Publisher: |
Elsevier |
Saved in:
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