Convergence, Financial Development, and Policy Analysis

Justin Lin (), Jianjun Miao and Pengfei Wang

No dp-307, Boston University - Department of Economics - The Institute for Economic Development Working Papers Series from Boston University - Department of Economics

Abstract: We study the relationship among inflation, economic growth, and financial development in a Schumpeterian overlapping-generations model with credit constraints. In the baseline case money is super-neutral. When the financial development exceeds some critical level, the economy catches up and then converges to the growth rate of the world technology frontier. Otherwise, the economy converges to a poverty trap with a growth rate lower than the frontier and with inflation decreasing with the level of financial development. We then study efficient allocation and identify the sources of inefficiency in a market equilibrium. We show that a particular combination of monetary and fiscal policies can make a market equilibrium attain the efficient allocation.

Keywords: Economic Growth; Innovation; Credit Constraints; Convergence; Policy Analysis; Money; Inflation (search for similar items in EconPapers)
JEL-codes: O11 O23 O31 O33 O38 O42 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2019-01
New Economics Papers: this item is included in nep-dge and nep-fdg
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Citations: View citations in EconPapers (3)

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Journal Article: Convergence, financial development, and policy analysis (2020)
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