Optimal Long-run Money Growth Rate in a Cash-in-Advance Economy with Labor-Market Frictions

Been-Lon Chen, Shian-Yu Liao, Dongpeng Liu () and Xiangbo Liu ()
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Dongpeng Liu: Nanjing University, https://www.nju.edu.cn/EN/main.htm
Xiangbo Liu: Renmin University of China

No 22-A003, IEAS Working Paper : academic research from Institute of Economics, Academia Sinica, Taipei, Taiwan

Abstract: We revisit the Friedman rule in a labor search model and extend Heer (2003), Cooley and Quadrini (2004), and Wang and Xie (2013) to one that allows for endogenous growth. We show that, even without a liquidity effect or a CIA constraint on firms’wage payment, our model offers a different channel for moderate money growth to increase welfare. Intuitively, in a one-sector endogenous growth economy, the technology is of constant returns with respect to capital. When the labor market is frictional, a moderate increase in money growth induces an expansion in vacancy and employment. Labor and capital are complements in production. With an increase in employment, when the technology is neoclassical, the decreasing return in capital leads to a lower marginal product of labor. However, in an endogenous growth framework wherein the technology exhibits socially constant returns in capital, the marginal product of labor is constant. Due to a constant marginal product of labor, modest inflation raises employment, enlarges economic growth, and increases welfare. Moreover, the optimallong-run inflation rate departs from the Friedman rule, even when the Hosios rule holds. Fi-nally, wefind that our model with sustainable growthfits the data better than that withoutsustainable growth.

Keywords: Endogenous Growth; Money Supply; Labor Search; Unemployment; Welfare (search for similar items in EconPapers)
JEL-codes: E41 J64 O42 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2022-08
New Economics Papers: this item is included in nep-cba, nep-dge, nep-gro and nep-mon
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Journal Article: Optimal long-run money growth rate in a cash-in-advance economy with labor-market frictions (2023)
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