Money and Growth in a Production Economy with Multiple Assets

Leo Kaas () and Gerd Weinrich
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Gerd Weinrich: Universita Cattolica

No 86, Economics Series from Institute for Advanced Studies

Abstract: We consider a Diamond-type model of endogenous growth in which there are three assets: outside money, government bonds, and equity. Due to productivity shocks, the equity return is uncertain, and risk averse investors require a positive equity premium. Typically, there exist two steady states, but only one of them is stable, both in the forward perfect foresight dynamics and under adaptive expectations. Tight monetary policy is harmful for growth in the stable steady state. These results hold under four different monetary policy strategies applied by the monetary authority. A monetary contraction increases the bond return, reduces the equity premium and thereby capital investment and growth.

Keywords: Monetary policy; Endogenous growth; Equity premium (search for similar items in EconPapers)
JEL-codes: D84 E52 O42 (search for similar items in EconPapers)
Date: 2000-10
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http://www.ihs.ac.at/publications/eco/es-86.pdf First version, 2000 (application/pdf)

Related works:
Journal Article: MONEY AND GROWTH IN A PRODUCTION ECONOMY WITH MULTIPLE ASSETS (2003)
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Persistent link: http://EconPapers.repec.org/RePEc:ihs:ihsesp:86

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