Abstract
We develop an overlapping generations monetary endogenous growth (generated by productive public expenditures) model with inflation targeting, characterized by relocation shocks for young agents, which in turn generates a role for money (even in the presence of the return-dominating physical capital) and financial intermediaries. Based on this model, we show that growth dynamics emerge with a S-shaped growth path producing three equilibria. The low and high-growth equilibria are stable, but locally indeterminate, while the medium-growth equilibrium is unstable. Since, government expenditure is productive in our model, a higher inflation-target would translate into higher growth, but under multiple equilibria, this is not necessarily always the case.
Highlights
Introducing money in general equilibrium models with single or multiple assets that yield non-negative nominal interest rate is, understandably, not straightforward
Government expenditure is productive in our model, a higher inflation-target would translate into higher growth, but under multiple equilibria, an increase in the inflation-target is not necessarily going to be growth-enhancing at the medium-growth unstable equilibrium, which cannot be ruled out due to indeterminancy of the two other stable equilibria
We develop an overlapping generations monetary endogenous growth model with an inflation-targeting central banker
Summary
Introducing (non-interest bearing) money in general equilibrium models with single or multiple assets that yield non-negative nominal interest rate is, understandably, not straightforward. In the process, adds to the recent literature of monetary endogenous growth OLG models with money being modelled either through the cash-in-advance constraint or cash-reserve requirements of banks, that has shown the existence of growth dynamics, multiple equilibria (with possibility of chaos), and local indeterminacy (see for example, Gupta and Vermeulen 2010; Gupta 2011; Kudoh 2013; Gupta and Stander 2018) Unlike these papers, which rely on an ad hoc approach of modelling financial intermediaries, we are able to provide a solid reasoning of the existence of banks based on the liquidity shock characterizing our model.
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