Monetary Economic Growth Theory Under Perfect Competition: Can Monetary Expansion Really Enhance Economic Growth?

Abstract

This chapter analyzes the properties of Keynesian monetary economic growth theory under perfect competition. Whether capital investment is constrained by effective demand is a critical factor that characterizes economic growth theories at different levels of competition. Whenever a firm faces a downward-sloping demand curve at a location determined by the strength of effective demand (real GDP), its capital accumulation is inevitably constrained by effective demand. Thus, as far as the business environment is kept unchanged, so is capital investment. However, when the market for goods is perfectly competitive, firms do not perceive such demand constraint, and capital investment advances autonomously and is independent of that phase of the business cycle. An important macroeconomic implication of the Keynesian growth model under perfect competition is the crowding out of assets, which means that an increase in money requires a higher rate of return (i.e. the inverse of the inflation rate) to equilibrate the market, and thus incurs higher opportunity cost to capital investment. This curtails capital investment and retards economic growth.