Dynamics in a Transactions-Based Monetary Growth Model

Abstract

This paper examines the dynamic properties of a monetary endogenous growth model in which money is introduced into the system via a transactions-cost technology. A monetary equilibrium that either satisfires the Friedman rule of the optimum quantity of money or accommodates the zero-inflation-rate policy is dynamically unstable. In a Cagan-like hyperinflationary environment, two possibilities arise: the monetary equilibrium may be unstable or exhibit dynamic indeterminacy in which a variety of equilibrium outcomes emerge in transition. The rate of monetary expansion, the relative magnitudes of the intertemporal elasticity of substitution and the production technological parameter are crucial for determining the stability property of the model. We characterize completely the transitional dynamics in the saddle-path case and generalize the basic model to allow for a convex production technology and an endogenous labor-leisure tradeoff to examine the robustness of the main findings.