Implement loose monetary policy contemporaneously

Info icon This preview shows pages 7–9. Sign up to view the full content.

implement loose monetary policy contemporaneously, there is still the need to explore other sources that can stimulate economic growth other than monetary policy in the long run. Georgios (1993) use annual post-war data for 32 countries and show that output and the price level are positively related along the aggregate supply and negatively related along the aggregate demand curve. This implies that the negative correlation between inflation and growth simply means that the price level has been countercyclical as aggregate supply shocks dominated aggregate demand shocks. He goes further to show that money growth has positive and permanent effects on inflation, but may affect output only in the short run as in the long run, money is probably neutral. Contemporary thought on the topic of money and growth has its origins in work by Tobin (1965). Tobin considers the allocation of a fixed flow of savings between two assets, money and physical capital. An increase in the rate of inflation lowers the real return on money, leading agents to substitute out of cash and into capital. This is the Tobin effect: higher rates of inflation are associated with a larger capital stock and a higher level of output per capita. Sidrauski (1967) proposed another version of the monetary growth theory, with his seminal work on the context of an infinitely-lived representative agent model where money is super neutral 6 . The main result in Sidrauski’s study is that an increase in the inflation rate does not affect the steady state capital stock and as such neither output nor economic growth is affected. Savings and money-demand functions are derived from optimizing behavior in this model, rather than postulated and held fixed as in Tobin’s work. The long- run stock of capital depends only on its depreciation rate, the population’s growth rate, and a representative agent’s subjective discount rate. Thus, money in Sidrauski’s model is super
Image of page 7

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

154 Musibau Adetunji Babatunde & Muhammed Isa Shuaibu neutral in the sense that changes in the rate of money growth and inflation have no effect on steady-state capital and output Subsequent work on money and growth has focused on the distinction between Tobin’s and Sidrauski’s conclusions about the effects of anticipated inflation on capital and output (See Fischer (1983), Bessler (1984), and Moroney (2002)). Each contribution to this literature asks which set of results, Tobin’s or Sidrauski’s, carries over to a new or more general setting. In some cases, the Tobin effect is present. Fischer (1979), for example, discovers that super neutrality in the Sidrauski model holds only in the long run. The Tobin effect appears along the transition path to the steady state, with higher inflation inducing faster capital accumulation. In other cases, Sidrauski’s results are confirmed. Jean-Pierre Danthine et al. (1987), for instance, present a stochastic money-in-the-utility-function model in which money comes very close to being super neutral. In still other cases, higher inflation decreases capital and output, so that neither Tobin’s nor Sidrauski’s results apply. In particular, inflation acts as a tax on productive
Image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern