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Endogenous Fluctuations in an Endogenous Growth Model with Inflation Targeting

Rangan Gupta () and Lardo Stander ()

No 201432, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper develops a monetary endogenous growth overlapping generations model characterized by production lags - specifically lagged capital inputs - and an inflation targeting monetary authority, and analyses the growth dynamics that emerge from this framework. The growth process is endogenized by allowing productive government expenditure on infrastructure, complementing the lagged private capital input. Following the extant literature, money is introduced by imposing a cash reserve requirement on an otherwise competitive banking sector. Given this framework, we show that multiple equilibria emerge along different growth paths, with the low-growth (high-growth) equilibrium being unstable (stable) and locally determinate (locally indeterminate). In addition, we show that convergent or divergent endogenous fl uctuations and even topological chaos could emerge around the high-growth equilibrium in the growth path where the monetary authority follows a high inflation targeting regime. Conversely, when the monetary authority follows a low inflation targeting regime, oscillations do not occur around either the low-growth or high-growth equilibrium.

Keywords: Endogenous fl uctuations; in flation targeting; chaos; production lags; indeterminacy (search for similar items in EconPapers)
JEL-codes: C62 E32 O42 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2014-06
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-gro, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
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