Dynamics in a transactions-based monetary growth model

Abstract

This paper characterizes the dynamics of a monetary endogenous growth model in which money is introduced into the system via a transactions-cost technology. A monetary equilibrium that either satisfies the Friedman rule of the optimum quantity of money or accommodates the zero-inflation-rate policy is dynamically unstable. With Cagan-like hyperinflation, the monetary equilibrium may either be unstable or exhibit dynamic indeterminacy in which a variety of equilibrium outcomes emerge in transition. The rate of monetary expansion, the relative magnitudes of the intertemporal elasticity of substitution and the production technological parameter are crucial for determining the stability property of the model.