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Monetary rules in a two-sector endogenous growth model

Author

Listed:
  • Antoine Le Riche
  • Francesco Magris

    (LEO - Laboratoire d'Économie d'Orleans [FRE2014] - UO - Université d'Orléans - UT - Université de Tours - CNRS - Centre National de la Recherche Scientifique)

  • Daria Onori

    (LEO - Laboratoire d'Économie d'Orleans [FRE2014] - UO - Université d'Orléans - UT - Université de Tours - CNRS - Centre National de la Recherche Scientifique)

Abstract
We study the balanced growth paths and their stability features of a monetary two-sector endogenous growth model with physical capital and human capital accumulation. The demand of money is motivated on the ground of a fractional cash-in-advance constraint on consumption expenditures and on those in the investment in physical capital. We consider, in sequence, two monetary rules implemented by the Central Bank. First, we assume that the latter pegs the money growth rate and then the nominal interest rate according to a Taylor feedback rule. When the Central Bank pegs the money growth rate, there emerges a unique balanced growth path which turns out to be indeterminate for a low amplitude of the liquidity constraint and/or for a low enough intertemporal elasticity of substitution in consumption even under the hypothesis that the cash-in-advance constraint applies uniquely on consumption expenditures. On the other hand, when the monetary policy is implemented according to a Taylor feedback rule, an unintended liquidity trap equilibrium may coexist with multiple interior Taylor equilibria. If, on the one hand, the liquidity trap equilibrium is bound to be locally determinate; on the other hand, the Taylor interior equilibrium may become locally indeterminate provided the cash-in-advance constraint applies also on the investment in physical capital good and under a physical capital intensive human capital good. A global analysis is performed in which we show that the Taylor equilibrium and the liquidity trap one are connected through a heteroclinic orbit.
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Suggested Citation

  • Antoine Le Riche & Francesco Magris & Daria Onori, 2020. "Monetary rules in a two-sector endogenous growth model," Post-Print hal-03532486, HAL.
    • Handle: RePEc:hal:journl:hal-03532486
    DOI: 10.1007/s00199-019-01188-6
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    Cited by:

    1. Le Riche, Antoine, 2022. "Balanced-budget fiscal rules and money growth pegging," Journal of Macroeconomics, Elsevier, vol. 73(C).
    2. Magris, Francesco & Onori, Daria, 2024. "Taylor and fiscal rules: When do they stabilize the economy?," Mathematical Social Sciences, Elsevier, vol. 128(C), pages 68-89.
    3. Fu, Wentao & Le Riche, Antoine, 2021. "Endogenous growth model with Bayesian learning and technology selection," Mathematical Social Sciences, Elsevier, vol. 114(C), pages 58-71.
    4. Zhiming Fu & Antoine Le Riche, 2021. "Progressive consumption tax and monetary policy in an endogenous growth model," Journal of Economics, Springer, vol. 133(3), pages 271-293, August.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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