Monetary policy and financial economic growth

Abstract

In this paper, we investigate the effectiveness of monetary policy in a modified neoclassical economic growth framework. We extend a two-asset model to a three-asset one by adding the bond market under the variation of parameters and show that the impact of monetary expansion on inflation is complete in the two-asset model but is not complete in the three-asset model. Moreover, we find that in both of these models, the impact of monetary policy (or equivalently inflation) on the economic growth is ambiguous due to the fiscal policy intervention, and public expectations play crucial roles for the effectiveness and transmission of monetary policy in economic growth models. Finally, we show that our models are stable.