Abstract
We introduce an informational asymmetry into an otherwise standard monetary growth model and examine its implications for the determinacy of equilibrium, for endogenous economic volatility, and for the relationship between steady-state output and the rate of money growth. Some empirical evidence suggests that, for economies with low initial inflation rates, permanent increases in the money growth rate raise long-run output levels. This relationship is reversed for economies with high initial inflation rates. Our model predicts this pattern. Moreover, in economies with high enough rates of inflation, credit rationing emerges, monetary equilibria become indeterminate, and endogenous economic volatility arises.
Article PDF
Similar content being viewed by others
Avoid common mistakes on your manuscript.
References
Azariadis, C. (1993). Intertemporal Macroeconomics. Oxford: Blackwell.
Azariadis, C., and B. Smith. (1994a). “Private Information, Money and Growth: Indeterminacy, Fluctuations, and the Mundell-Tobin Effect”. Manuscript.
Azariadis, C., and B. Smith (1994b). “Financial Intermediation and Regime Switching in Business Cycles”. Manuscript.
Backus, D., and P. Kehoe. (1992). “International Evidence on the Historical Properties of Business Cycles”. American Economic Review 82, 864–888.
Boyd, J., and B. Smith (1994). “Capital Market Imperfections in a Monetary Growth Model”. Manuscript, Federal Reserve Bank of Minneapolis.
Brock, W. (1974). “Money and Growth: The Case of Long-Run Perfect Foresight”. International Economic Review 15, 750–777.
Brock, W. (1975). “A Simple Perfect Foresight Monetary Model”. Journal of Monetary Economics 1, 133–150.
Bullard, J., and J. Keating (1994). “Superneutrality in Postwar Economies”. Manuscript, Federal Reserve Bank of St. Louis.
Cooley, T., and G. Hansen. (1989). “The Inflation Tax in a Real Business Cycle Model”. American Economic Review 79, 733–748.
Cooper, D. (1993). “Inflation vs. Economic Growth: A Long Term Relation, 1960–1990”. Mimeo, UCLA.
Danthine, J.-P. (1985). “Inflation and Growth in Utility-Maximizing Models”. Mimeo, University of Lausanne.
De Gregorio, J. (1992). “The Effects of Inflation on Economic Growth: Lessons From Latin America”. European Economic Review 36, 417–425.
Diamond, P. (1965). “National Debt in a Neoclassical Growth Model”. American Economic Review 55, 1126–1150.
Drazen, A. (1981). “Inflation and Capital Accumulation Under a Fixed Horizon”. Journal of Monetary Economics 8, 247–260.
Fischer, S. (1981). “Toward an Understanding of the Costs of Inflation: II”. Carnegie-Rochester Conference Series on Public Policy 15.
Fischer, S. (1991). “Growth, Macroeconomics and Development”. NBER Working Paper 3702.
Friedman, M. (1960). A Program for Monetary Stability. New York: Fordman University Press.
Friedman, M. (1992). Money Mischief: Episodes in Monetary History. New York: Harcourt Brace Jovanovich.
Friedman, M., and A. Schwartz. (1963). A Monetary History of the United States, 1867–1960. Princeton: Princeton University Press.
Fry, M. (1988). Money, Interest, and Banking in Economic Development. Baltimore: Johns Hopkins University Press.
Heymann, D., and A. Leijonhufvud. (1992). “High Inflations”. Manuscript, UCLA.
Jaffee, D., and E. Kleiman. (1977). “The Welfare Implications of Uneven Inflation”. In Inflation Theory and Anti-Inflation Policy. London: Macmillan.
Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. London: Macmillan.
Levine, R., and R. Renelt. (1992). “A Sensitivity Analysis of Cross-Country Growth Regressions”. American Economic Review 82, 942–963.
Lucas, R. (1988). “On the Mechanics of Economic Development”. Journal of Monetary Economics 21, 3–42.
McKinnon, R. (1973). Money and Capital in Economic Development. Washington, DC: Brookings.
Mints, L. (1945), A History of Banking Theory in Great Britain and the United States. Chicago: University of Chicago Press.
Mundell, R. (1965). “Growth, Stability and Inflationary Finance”. Journal of Political Economy 73, 97–109.
Patrick, H. T. (1966). “Financial Development and Economic Growth in Underdeveloped Countries”. Economic Development and Cultural Change 14, 174–189.
Rothschild, M., andJ. Stiglitz. (1976). “Equilibrium in Competitive Insurance Markets: The Economics of Incomplete Information”. Quarterly Journal of Economics 91, 629–650.
Schreft, S. (1990). “Credit Controls: 1980”. Federal Reserve Bank of Richmond Economic Review 77, 29–34.
Schreft, S., and R. Owen. (1992). “Identifying Credit Crunches”. Manuscript, Federal Reserve Bank of Richmond.
Schreft, S., and B. Smith. (1994). “Money, Banking, and Capital Formation”. Manuscript, Cornell University.
Shaw, E. (1973). Financial Deepening in Economic Development. New York: Oxford University Press.
Shell, K., M. Sidrauski, and J. E. Stiglitz. (1969). “Capital Gains, Income and Saving”. Review of Economic Studies 36, 15–26.
Sidrauski, M. (1967). “Rational Choice and Patterns of Economic Growth in a Monetary Economy”. American Economic Review 57, 535–545.
Simons, H. (1948). Economic Policy for a Free Society. Chicago: University of Chicago Press.
Stiglitz, J., and A. Weiss. (1981). “Credit Rationing in Markets with Imperfect Information”. American Economic Review 71, 393–410
Stockman, A. (1981). “Anticipated Inflation and the Capital Stock in a Cash-in-Advance Economy”. Journal of Monetary Economics 8, 387–393.
Tirole, J. (1985). “Asset Bubbles and Overlapping Generations”. Econometrica 53, 1499–528.
Tobin, J. (1965). “Money and Economic Growth”. Econometrica 33, 671–684.
Tun Wai, U., and H. Patrick. (1973). “Stock and Bond Issues and Capital Markets in Less Developed Countries”. IMF Staff Papers 20, 253–317.
Wynne, M. (1993). “Price Stability and Economic Growth”. Southwest Economy, Federal Reserve Bank of Dallas.
Uzawa, H. (1965). “Optimum Technical Change in an Aggregative Model of Economic Growth”. International Economic Review 6, 18–31.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Azariadis, C., Smith, B.D. Private information, money, and growth: Indeterminacy, fluctuations, and the Mundell-Tobin effect. J Econ Growth 1, 309–332 (1996). https://doi.org/10.1007/BF00141041
Issue Date:
DOI: https://doi.org/10.1007/BF00141041