Neoclassical Monetary Growth Model Research Articles

The Effects of Monetary and Fiscal Policies on Crime

This paper investigates whether monetary and fiscal policies, such as lump-sum taxes, distortionary taxation and monetization of public deficit, have criminal impacts. We address this question extending the neoclassical monetary growth model. We have demonstrated that fiscal policies affect crime through government spending. Conversely, the effect of monetary policy, especially inflation, on crime depends on the separability of the utility function.

Decreasing Marginal Impatience in a Monetary Growth Model

Unlike the standard assumption that the degree of impatience, measured by the rate of time preference, is increasing in wealth, empirical studies support that impatience is marginally decreasing. By introducing decreasing marginal impatience into the neoclassical monetary growth model a la Sidrauski, we show that (i) consistently with empirical results, an increase in the core rate of inflation reduces capital stocks in a steady state; and that (ii) its long-run welfare cost is larger than predicted with increasing or constant marginal impatience, implying that estimates of the inflation cost which have so far been obtained by assuming constant time preference may be underestimates.

Inflation, Factor Substitution and Growth

Recent empirical studies on the inflation-growth-relationship underline that inflation has negative growth effects already under relatively modest rates. Most contributions to monetary growth theory, however, have difficulties in explaining such a pattern. It is shown in this paper that this problem can be overcome by establishing a link between monetary instability and the aggregate elasticity of factor substitution. Several microeconomic justifications can be found for a negative influence of inflation on factor substitution. It turns out that already in a simple neoclassical monetary growth model this effect is usually strong enough to question the superneutrality benchmark result in the steady state and to dominate all potential positive effects of inflation along the convergence path. In a more general perspective the paper contributes to a better integration of institutional change in aggregate models of economic growth. JEL Classification: E52, O11, O41

Environment, growth and fiscal and monetary policies

This paper investigates whether monetary and fiscal policies, such as lump-sum taxes, distortionary taxation and monetization of public deficit, have environmental impacts. We address this question extending the neoclassical monetary growth model. We include a state equation for natural resources, and consider natural resources as an input in the production function. Fiscal policy, through public spending, always has environmental impact. Monetary policy affects the environment if money is considered as a device to reduce transaction costs or as necessary to buy goods according to cash-in-advance models. However, the qualitative impact of both policies on the environment cannot be determined. All results depend on the effect of capital on the natural resources dynamics. The model provides a framework which relates public spending and inflation with environment.

Stabilization effect of endogenous money supply in a descriptive neoclassical growth model

This paper develops a neoclassical monetary growth model with myopic perfect foresight in which monetary expansion rate changes with government budget deficit or surplus. We show the saddlepoint instability of the neoclassical monetary growth model assuming that the constant money growth policy can be avoided under the endogenous money supply rule. We also compare the purely money-financed regime where no government bonds exist with the mixed-financed strategy under which government deficit is partly financed by issuing interest-yielding securities. Our result suggests that the destabilizing effect of bond financing, which has been frequently observed in Keynesian macrodynamic models, does not necessarily hold in the neoclassical system.

The flow equilibrium and the neutrality of money in a neoclassical monetary growth model

We reconstruct the one-sector neoclassical monetary growth theory to make it internally consistent in the sense of Hayakawa's (1982) argument. This requires that the theory be formulated in terms of a flow equilibrium model in which the rate of change in the inflation rate is determined as a function of real balances per capita, the capital-labor ratio, and the inflation rate. We show that the super-neutrality of money can be established even though household disposable income is defined to include real balance flows as in the traditional case.

Rationality of liquidity preferences and the neoclassical monetary growth model

In the neoclassical monetary growth literature, the rationality condition in the sense of freedom from money illusion is imposed on the demand for nominal balances by assuming that this demand is homogenous of degree one in nominal income and nominal wealth. We argue that the price level should enter into this demand as a separate argument, and that the rationality condition should require that the demand be homogenous of degree one in nominal income, nominal wealth, and the price level. Then, the symmetry issue of the real purchasing power is consequential to the structure of the neoclassical monetary growth model.

The symmetry of real purchasing power and the neoclassical monetary growth model

It has been argued that the usual instability property of the neoclassical monetary growth model can be removed if an asymmetric treatment of real purchasing power between the real and monetary sectors is eliminated, i.e., if the demand for money is made to depend on disposable income and not income. Basically, the argument is that this symmetry can offset the destabilizing forces of the Wicksell effect of the rate of inflation on the demand for money. We show that, under the usual stipulations of the model, the instability (saddle-point) nature of the model cannot be altered by such an argument.

Real purchasing power in the neoclassical monetary growth model

In the one sector neoclassical monetary growth model, the balanced growth path under perfect foresight is a saddle point. The paper demonstrates that this instability problem can be resolved by entering real purchasing power into the liquidity preference function as well as into the consumption function. This process allows an additional mechanism based on income effects in money demand by which a change in real balances can influence the growth path. Stability now depends critically on the size of such income effects given wealth effects from money demand. If stability is restored, the nature of the traditional non-neutrality of money must be qualified.

MONETARY EXPERIMENTS IN A NEOCLASSICAL MODEL

A Neoclassical Monetary Growth Model is formulated in which income is taken to be exogenous. A rise in the expected rate of inflation raises the price level but has an effect of indeterminate sign on the rate of interest. An increase in the quantity of money causes a more-than-proportional increase in the price level so that velocity rises. Therefore money is not neutral in the short run.

Money as a medium of exchange and monetary growth in an underdevelopment context

This paper constructs a neoclassical monetary growth model applicable to less developed economies, in that (1) the economy is assumed to be labour-surplus (as a result of which its steady-state growth rate is an endogenous variable), and (2) differential savings propensities on the part of profit- and wage-earners are postulated. The model predicts that an increase in the rate of monetary expansion increases the steady-state rate of inflation, increases the capital-labour ratio, reduces the money-labour ratio, and reduces the steady-state growth rate. Because of this last-mentioned fact, an inflationary policy is held to be unfavorable to economic development, despite the fact that it increases the capital-labour ratio. Some implications of the analysis for the well-known ‘choice of techniques’ problem are also discussed.

A Neoclassical Monetary Growth Model: Reply

A Neoclassical Monetary Growth Model: Reply

A Neoclassical Monetary Growth Model with Independent Savings and Investment Functions

A Neoclassical Monetary Growth Model with Independent Savings and Investment Functions