Capital market imperfections in a monetary growth model |
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Authors: | John H Boyd Bruce D Smith |
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Institution: | (1) Federal Reserve Bank of Minneapolis and Finance Department, 735 Management and Economics, University of Minnesota, 271 19th Avenue South, Minneapolis, MN 55455, USA, US;(2) Federal Reserve Bank of Minneapolis and University of Texas at Austin, Austin, TX 78712, USA, US |
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Abstract: | Summary. We consider a monetary growth model essentially identical to that of Diamond (1965) and Tirole (1985), except that we explicitly
model credit markets, a credit market friction, and an allocative function for financial intermediaries. These changes yield
substantially different results than those obtained in more standard models. In particular, if any monetary steady state equilibria
exist, there are generally two of them; one of these has a low capital stock and output level, and it is necessarily a saddle.
The other steady state has a high capital stock and output level; either it is necessarily a sink, or its stability properties
depend on the rate of money creation. It follows that monetary equilibria can be indeterminate, and nonconvergence phenomena
can be observed. Increases in the rate of money creation reduce the capital stock in the high-capital-stock steady state.
If the high-capital-stock steady state is not a sink for all rates of money growth, then increases in the rate of money growth
can induce a Hopf bifurcation. Hence dynamical equilibria can display damped oscillation as a steady state equilibrium is
approached, and limit cycles can be observed as well. In addition, in the latter case, high enough rates of inflation induce
the kinds of “crises” noted by Bruno and Easterly (1995): when inflation is too high there are no equilibrium paths approaching
the high-activity steady state.
Received: November 18, 1995; revised version: March 26, 1996 |
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Keywords: | JEL Classification Numbers: E40 E44 016 |
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