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Growth and the Effects of Monetary Policy

EGMP1. "Growth and the Effects of Inflation," joint with R. E. Manuelli, Journal of Economic Dynamics and Control , 1995, Vol. 19, No. 8, pages 1405-1428.
EGMP2. "The Growth Effects of Monetary Policy," joint with V. V. Chari and R. E. Manuelli, Quarterly Review of Federal Reserve Bank of Minneapolis , Fall 1995, pages 18-32.
EGMP3. "Inflation, Growth and Financial Intermediation," with V. V. Chari and R. E. Manuelli, The Review of the Federal Reserve Bank at St. Louis , May/June 1996. vol. 76, 3. pp. 41-58.

These three papers all deal with the growth effects of different aspects of monetary policy. There are two types of questions addressed.

Can the types of endogenous growth models described in EGFP1-EGFP5 above, when coupled with appropriate models of money demand, deliver the negative correlation between inflation and growth seen in the empirical literature?

We show that the answer to this question is yes for a wide range of models of endogenous growth and money demand.

Can this class of models deliver the quantitative effects that are seen in the empirical literature?


The answer to this second, quantitative, question is no. That is, although the models do deliver a negative correlation between inflation and growth, the size of this effect for parameterized versions of these models is much smaller than what is observed in the data. If the effects of correlated changes in reserve requirements on banks are included the predicted effect of inflation on growth is larger, but, generally speaking is still too small.