Inflation and Capital Stock in The Long Run

Abstract

The validity of the Tobin effect in the monetary growth literature depends largely on whether a model supports the substitutability or complementarity hypothesis regarding money and capital. This paper presents an overlapping generations monetary economy in which either hypothesis can be addressed, depending on the specified role of money and the role of government in the capital market. The model with money as single outside asset in which money is held purely on speculative grounds generates the Tobin effect. However, in the model with multiple means of payment, the Tobin effect depends on the elasticity of substitution between cash and credit goods. For example, the reverse-Tobin effect prevails unambiguously when goods are complements. In the extended model with multiple outside assets, the reverse-Tobin effect becomes more likely. Under logarithmic utility, we show that the Tobin effect no longer holds due to the crowding out effect.