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Convergence, financial development, and policy analysis

Justin Yifu Lin (), Jianjun Miao () and Pengfei Wang ()
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Justin Yifu Lin: Peking University

Economic Theory, 2020, vol. 69, issue 3, No 1, 523-568

Abstract: 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)
Date: 2020
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DOI: 10.1007/s00199-019-01181-z

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