RANDOM MATCHING AND MONEY IN THE NEOCLASSICAL GROWTH MODEL: SOME ANALYTICAL RESULTS

I use the monetary version of the neoclassical growth model developed by Aruoba, Waller, and Wright [Journal of Monetary Economics (2011)] to study the properties of the model when there is exogenous growth. I first consider the planner's problem, and then the equilibrium outcome in a monetary...

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Bibliographic Details
Published in:Macroeconomic dynamics 2011-09, Vol.15 (S2), p.293-312
Main Author: Waller, Christopher J.
Format: Article
Language:English
Subjects:
Analysis
Bargaining
Central banks
Consumption
Economic growth
Economic theory
Equilibrium
Federal Reserve monetary policy
Growth models
Income
Interest rates
Macroeconomics
Per capita
Studies
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Summary:I use the monetary version of the neoclassical growth model developed by Aruoba, Waller, and Wright [Journal of Monetary Economics (2011)] to study the properties of the model when there is exogenous growth. I first consider the planner's problem, and then the equilibrium outcome in a monetary economy. I do so by first using proportional bargaining to determine the terms of trade and then considering competitive price taking. I obtain closed-form solutions for all variables along the balanced growth path in all cases. I then derive closed-form solutions for the transition paths under the assumption of full depreciation and, in the monetary economy, a particular nonstationary interest rate policy. The key result is that inflation is damaging to per capita income levels along the balanced growth path and to short-run growth of the economy.
ISSN:1365-1005
1469-8056
DOI:10.1017/S1365100510000726