Three Essays on Monetary Economics in Optimal Growth Model
Date Issued
2008
Date
2008
Author(s)
Lu, Chia-Hui
Abstract
This dissertation includes three essays on monetary economics in optimal growth model. The first essay studies the role of an endogenous time preference on the relationship between inflation and growth in the long run in both the MIUF and TC models. We establish a qualitative equivalence between the two models in a setup without a labor-leisure tradeoff. When the time preference is decreasing (or increasing) in consumption and real balances, both the MIUF and TC models are qualitatively equivalent in terms of predicting a negative (or positive) relationship between inflation and growth in a steady state. Both a decreasing and an increasing time preference in consumption are consistent with the arguments found within in the literature. While a decreasing time preference in real balances corroborates with empirical evidence, there is no evidence in support of an increasing time preference in real balances. The second essay studies the dynamic behavior of capital accumulation in a neoclassical growth model with a CIA constraint. This essay contributes to existing literature in two respects. First, a general CIA constraint is considered. We allow for the degree of CIA constraints on investment relative to that on consumption smaller or larger than one. Second, we analyze the dynamic equilibrium path of monetary shocks as opposed to a steady-state path in existing studies. Three types of shock to monetary supply are envisaged, both in terms of a permanent and a temporary shock. The dynamic behavior of equilibrium paths depends crucially on whether the relative degree of CIA constraints on investment is larger or smaller than one. Existing literature with the relative degree of CIA constraints on investment equaling or smaller than one is at the risk of neglecting the predicted patterns of equilibrium paths associated with another side of the relative CIA constraints. In order to explain multiple growth regimes, one of the most popular working hypotheses is based on initial conditions along with assumptions such as nonlinearities of production, subsistence consumption and heterogeneous agents/savings behavior. The third essay argues that a standard optimal growth model with a status effect represented by wealth naturally establishes multiple growth regimes without reliance on other assumptions. With a welfare effect, the resulting equilibrium distribution is characterized by a group with a lower level of income and another group with a higher level of income. Globally, a sufficiently strong monetary policy may be an instrument in order for an economy in a poverty trap to take off and become wealthy in the long run. Locally, our model sheds light on the relationship between money/inflation and capital in the long run that, given general cash-in-advance constraints on investment relative to consumption, is determined by the curvature of the utilities of wealth and consumption.
Subjects
endogenous time preferences
qualitative equivalence
capital accumulation
CIA constraint
dynamics
wealth effect
development trap
Type
thesis
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