Private information, money, and growth: Indeterminacy, fluctuations, and the Mundell-Tobin effect

We introduce an informational asymmetry into an otherwise standard monetary growth model and examine its implications for the determinacy of equilibrium, for endogenous economic volatility, and for the relationship between steady-state output and the rate of money growth. Some empirical evidence suggests that, for economies with low initial inflation rates, permanent increases in the money growth rate raise long-run output levels. This relationship is reversed for economies with high initial inflation rates. Our model predicts this pattern. Moreover, in economies with high enough rates of inflation, credit rationing emerges, monetary equilibria become indeterminate, and endogenous economic volatility arises.