Financial Deepening and Monetary Growth with Endogenous Liquidity Constraints

Ming-Fu Shaw and Ching-chong Lai

Journal of Economics and Management, 2013, vol. 9, issue 1, 1-12

Abstract: This paper sets up a monetary growth model with an endogenous liquidity constraint on consumption, and uses it to analyze the economy's long-run response to money growth. We find that a rise in the rate of money growth will increase the consumer's financial deepening, thereby leading to a reduction in the liquidity constraint on consumption and a rise in the consumption-capital ratio. With such an adjustment, the representative household can borrow more and raise its consumption. As a consequence, a rise in the rate of money growth will deter the savings rate and the economic growth rate.

Keywords: endogenous liquidity constraints; financial deepening; endogenous growth (search for similar items in EconPapers)
JEL-codes: E52 O42 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:jec:journl:v:9:y:2013:i:1:p:1-12

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