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Monetary rules in a two-sector endogenous growth model

Antoine Riche (), Francesco Magris and Daria Onori
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Antoine Riche: Sichuan University

Economic Theory, 2020, vol. 69, issue 4, No 6, 1049-1100

Abstract: Abstract We study the balanced growth paths and their stability features of a monetary two-sector endogenous growth model with physical capital and human capital accumulation. The demand of money is motivated on the ground of a fractional cash-in-advance constraint on consumption expenditures and on those in the investment in physical capital. We consider, in sequence, two monetary rules implemented by the Central Bank. First, we assume that the latter pegs the money growth rate and then the nominal interest rate according to a Taylor feedback rule. When the Central Bank pegs the money growth rate, there emerges a unique balanced growth path which turns out to be indeterminate for a low amplitude of the liquidity constraint and/or for a low enough intertemporal elasticity of substitution in consumption even under the hypothesis that the cash-in-advance constraint applies uniquely on consumption expenditures. On the other hand, when the monetary policy is implemented according to a Taylor feedback rule, an unintended liquidity trap equilibrium may coexist with multiple interior Taylor equilibria. If, on the one hand, the liquidity trap equilibrium is bound to be locally determinate; on the other hand, the Taylor interior equilibrium may become locally indeterminate provided the cash-in-advance constraint applies also on the investment in physical capital good and under a physical capital intensive human capital good. A global analysis is performed in which we show that the Taylor equilibrium and the liquidity trap one are connected through a heteroclinic orbit.

Keywords: Cash-in-advance; Endogenous growth; Indeterminacy; Monetary policy; Two-sector (search for similar items in EconPapers)
JEL-codes: E32 E52 O41 O42 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s00199-019-01188-6

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