Hostname: page-component-7479d7b7d-pfhbr Total loading time: 0 Render date: 2024-07-09T23:20:50.846Z Has data issue: false hasContentIssue false
  • English
  • Français

Optimal long-run money growth rate in a cash-in-advance economy with labor-market frictions

Published online by Cambridge University Press:  02 September 2022

Been-Lon Chen ,
Shian-Yu Liao ,
Dongpeng Liu  and
Xiangbo Liu
Been-Lon Chen*
Affiliation:
Institute of Economics, Academia Sinica, Taipei, Taiwan
Shian-Yu Liao
Affiliation:
Department of Economics, Fu Jen Catholic University, New Taipei City, Taiwan
Dongpeng Liu
Affiliation:
Department of Economics, Nanjing University, Nanjing, Jiangsu, China
Xiangbo Liu*
Affiliation:
School of Labor and Human Resources, Renmin University of China, Beijing, China
*
*Corresponding authors. Email: xiangbo.liu@ruc.edu.cn; bchen@econ.sinica.edu.tw.
*Corresponding authors. Email: xiangbo.liu@ruc.edu.cn; bchen@econ.sinica.edu.tw.
Get access Rights & Permissions [Opens in a new window]

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 optimal long-run inflation rate departs from the Friedman rule, even when the Hosios rule holds. Finally, we find that our model with sustainable growth fits the data better than that without sustainable growth.

Keywords

Endogenous growthmoney supplylabor searchunemploymentwelfare
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 6 , September 2023 , pp. 1737 - 1766
Copyright
© The Author(s), 2022. Published by Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ahmed, S. and Rogers, J. H.. (2000) Inflation and the great ratios: Long-term evidence from the U.S. Journal of Monetary Economics 45(1), 3–35.10.1016/S0304-3932(99)00040-9CrossRefGoogle Scholar
Albrecht, J. and Vroman, S.. (2002) A matching model with endogenous skill requirement. International Economic Review 43(1), 283–305.CrossRefGoogle Scholar
Andolfatto, D. (1996) Business cycles and labor-market search. American Economic Review 86, 112–132.Google Scholar
Andolfatto, D., Hendry, S. and Moran, K.. (2004) Labour markets, liquidity, and monetary policy regimes. Canadian Journal of Economics 37(2), 392–420.CrossRefGoogle Scholar
Bean, C. and Pissarides, C.. (1993) Unemployment, consumption and growth. European Economic Review 37(4), 837–859.10.1016/0014-2921(93)90093-PCrossRefGoogle Scholar
Bhattacharya, J., Haslag, J. and Martin, A.. (2009) Optimal monetary policy and economic growth. European Economic Review 53(2), 210–221.CrossRefGoogle Scholar
Bullard, J. and Keating, J. W.. (1995) The long-run relationship between inflation and output in postwar economies. Journal of Monetary Economics 36(3), 477–496.CrossRefGoogle Scholar
Chen, B.-L., Lu, C.-H. and Hsu, M.. (2011) The dynamic relationship between inflation and output growth in a cash-constrained economy. B.E. Journal of Macroeconomics 11(15), 1–27.Google Scholar
Chen, B.-L. and Liao, S.-Y.. (2015) The role of agricultural productivity on structural change. Review of Development Economics 19(4), 971–987.CrossRefGoogle Scholar
Chen, K., İmrohoroğlu, A. and İmrohoroğlu, S.. (2006) The Japanese saving rate. American Economic Review 96(5), 1850–1858.CrossRefGoogle Scholar
Chu, A. C., Cozzi, G., Fan, H. and Furukawa, Y.. (2021) Inflation, unemployment and economic growth in a schumpeterian economy. Scandinavian Journal of Economics 123(3), 874–909.CrossRefGoogle Scholar
Clower, R. W. (1967) A reconsideration of the micro foundations of monetary theory. Western Economic Journal 6, 1–9.Google Scholar
Cooley, T. F. (1995) Frontiers of Business Cycle Research. Princeton, NJ: Princeton University Press.10.1515/9780691218052CrossRefGoogle Scholar
Cooley, T. F. and Hansen, G. D.. (1989) The inflation tax in a real business cycle model. American Economic Review 79, 733–748.Google Scholar
Cooley, T. F. and Quadrini, V.. (2004) Optimal monetary policy in a phillips-curve world. Journal of Economic Theory 118(2), 174–208.10.1016/j.jet.2003.12.010CrossRefGoogle Scholar
Diamond, D. W. and Dybvig, P. H.. (1983) Bank runs, deposit insurance, and liquidity. Journal of Political Economy 91(3), 191–206.CrossRefGoogle Scholar
Diamond, P. A. (1982) Aggregate demand management in search equilibrium. Journal of Political Economy 90(5), 881–894.CrossRefGoogle Scholar
Diamond, P. A. and Maskin, E.. (1979) An equilibrium analysis of search and breach of contract, I: Steady states. Bell Journal of Economics 10(1), 282–316.CrossRefGoogle Scholar
Domeij, D. (2005) Optimal capital taxation and labor market search. Review of Economic Dynamics 8(3), 623–650.CrossRefGoogle Scholar
Dorval, B. and Smith, G. W.. (2015) Interwar inflation, unexpected inflation, and output growth. Journal of Money, Credit and Banking 47(8), 1599–1615.CrossRefGoogle Scholar
Eriksson, C. (1997) Is there a trade-off between employment and growth? Oxford Economic Paper 49(1), 77–88.10.1093/oxfordjournals.oep.a028598CrossRefGoogle Scholar
Fischer, S. (1983) Inflation and growth, NBER Working Paper No. 1235, Available at SSRN: https://ssrn.com/abstract=227544.Google Scholar
Friedman, M. (1969) The Optimum Quantity of Money. In: Friedman, M.(eds.), The Optimum Quantity of Money and Other Essays, pp. 1–50. Chicago: University of Chicago Press.Google Scholar
Ghossoub, E. A. and Reed, R. R.. (2019) Banking competition, production externalities, and the effects of monetary policy. Economic Theory 67(1), 91–154.10.1007/s00199-017-1086-4CrossRefGoogle Scholar
Ghosh, A. and Phillips, S.. (1998) Warning: Inflation may be harmful to your growth. IMF Staff Papers 45(4), 672–710.CrossRefGoogle Scholar
Gomme, P. (1993) Money and growth revisited. Journal of Monetary Economics 32(1), 51–77.CrossRefGoogle Scholar
Hall, R. E. and Milgrom, P. R.. (2008) The limited influence of unemployment on the wage bargain. American Economic Review 98(4), 1653–1674.CrossRefGoogle Scholar
He, H. and Liu, Z.. (2008) Investment-specific technological change, skill accumulation, and wage inequality. Review of Economic Dynamics 11(2), 314–334.CrossRefGoogle Scholar
Heer, B. (2000). Welfare costs of inflation in a dynamic economy with search unemployment and endogenous growth. Germany: University of Munich, CESifo Working Paper No. 296.Google Scholar
Heer, B. (2003) Welfare costs of inflation in a dynamic economy with search unemployment. Journal of Economic Dynamics and Control 28(2), 255–272.CrossRefGoogle Scholar
Hwang, Y.-N. and Ho, P.-Y.. (2012) Optimal monetary policy for Taiwan: A dynamic stochastic general equilibrium framework. Academia Economic Papers 20, 447–482.Google Scholar
Jones, L. E. and Manuelli, R. E.. (1995) Growth and the effects of inflation. Journal of Economic Dynamics and Control 19(8), 1405–1428.CrossRefGoogle Scholar
Khan, M. S. and Senhadji, A. S.. (2001) Threshold effects in the relationship between inflation and growth. IMF Staff Papers 48, 1–21.Google Scholar
King, R. G., Plosser, C. I. and Rebelo, S. T.. (1998) Production, growth and business cycles. Journal of Monetary Economics 21(2-3), 195–232.CrossRefGoogle Scholar
Kydland, F. E. and Prescott, E. C.. (1982) Time to build and aggregate fluctuations. Econometrica 50(6), 1345–1370.CrossRefGoogle Scholar
Killingsworth, M. R. (1983) Labor Supply. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Lucas, R. E. Jr. (1980) Equilibrium in a pure currency economy. Economic Inquiry 18(2), 203–220.CrossRefGoogle Scholar
Lucas, R. (1990) Liquidity and interest rates. Journal of Economic Theory 50(2), 237–264.CrossRefGoogle Scholar
Lucas, R. and Stokey, N. L.. (1983) Optimal fiscal and monetary policy in an economy without capital. Journal of Monetary Economics 12(1), 55–93.CrossRefGoogle Scholar
Lucas, R. and Stokey, N. L.. (1987) Money and interest in a cash-in-advance economy. Econometrica 55(3), 491–513.CrossRefGoogle Scholar
MaCurdy, T. E. (1981) An empirical model of labor supply in a life cycle setting. Journal of Political Economy 89(6), 1059–1085.CrossRefGoogle Scholar
Merz, M. (1995) Search in the labor market and the real business cycle. Journal of Monetary Economics 36(2), 269–300.CrossRefGoogle Scholar
Mortensen, D. T. and Pissarides, C. A.. (1994) Job creation and job destruction in the theory of unemployment. Review of Economic Studies 61(3), 397–415.CrossRefGoogle Scholar
Pissarides, C. A. (1990) Equilibrium Unemployment Theory. Cambridge, MA: Basil Blackwell.Google Scholar
Postel-Vinay, F. (1998) Transitional dynamics of the search model with endogenous gowth. Journal of Economic Dynamics and Control 22(7), 1091–1115.CrossRefGoogle Scholar
Romer, P. M. (1986) Increasing returns and long-run growth. Journal of Political Economy 94(5), 1002–1037.CrossRefGoogle Scholar
Shi, S. and Wen, Q.. (1997) Labor market search and capital accumulation: Some analytical results. Journal of Economic Dynamics and Control 21(10), 1747–1776.CrossRefGoogle Scholar
Shi, S. and Wen, Q.. (1999) Labor market search and the dynamic effects of taxes and subsidies. Journal of Monetary Economics 43(2), 457–495.CrossRefGoogle Scholar
Stockman, A. C. (1981) Anticipated inflation and the capital stock in a cash-in-advance economy. Journal of Monetary Economics 8(3), 387–393.CrossRefGoogle Scholar
Wang, P. and Xie, D.. (2013) Real effects of money growth and optimal rate of inflation in a cash-in-advance economy with labor-market frictions. Journal of Money, Credit and Banking 45(8), 1517–1546.CrossRefGoogle Scholar
Wang, P. and Yip, C. K.. (1992) Alternative approaches to money and growth. Journal of Money, Credit, and Banking 24(4), 553–562.CrossRefGoogle Scholar