Faculty of Economics and Business Administration Publications Database

Monetary Policy, Factor Substitution, and Convergence

Jurkat, Anne
ISSN-Print: 1365-1005
Link External Source: Online Version
Year: 2016

In this paper, we examine the influence of monetary policy on the speed of convergence in a standard monetary growth model à la Sidrauski allowing for differences in the elasticity of substitution between factors of production. The respective changes in the rate of convergence and its sensitivities to the central model parameters are derived both analytically and numerically. By normalizing the constant elasticity of substitution (CES) production functions both outside the steady state and within the steady state, it is possible to distinguish between an efficiency and a distribution effect of a change in the elasticity of substitution. We show that monetary policy is the more effective, the lower is the elasticity of substitution, and that the impact of monetary policy on the speed of convergence is mainly channeled via the efficiency effect.