Faculty of Economics and Business Administration Publications Database

Money And Growth In A Production Economy With Multiiple Assets

Weinrich, Gerd
Volume: 7
Pages: 670 - 690
Month: November
ISSN-Print: 1365-1005
Link External Source: Online Version
Year: 2003

We consider a Diamond-type model of endogenous growth in which there are three assets: outside money, government bonds, and equity. Due to productivity shocks, the equity return is uncertain, and risk averse investors require a positive equity premium. Typically, there exist two steady states, but only one of them is stable, both in the forward perfect foresight dynamics and under adaptive expectations. Tight monetary policy is harmful for growth in the stable steady state. These results hold under four different monetary policy strategies applied by the monetary authority. A monetary contraction increases the bond return, reduces the equity premium and thereby capital investment and growth.